Question

Suarez Company uses the straight-line method of depreciation. The company purchased a computer system on January 1, Year 1, for $1,600,000 with an expected life of six years and a salvage value of $130,000. Assuming the computer is sold on July 1, Year 3 for $1,000,000 cash, prepare the journal entries to record depreciation for the first 6 months of Year 3 and the sale of the computer.

Can u please put it in a chart so I know how to format the journal entry? Thank you

Answer 1

First let us know the annual straightline depreciation;

(cost - salvage value) / number of years of life

=> (1,600,000-130,000)/ 6 years

=>$245,000.

now, depreciation till July 1, year 3 = annual depreciation * 2.5 years

=>$612,500.

book value as on July 1 year 3 = purchase price -accumulated depreciation

$1,600,000-612,500

=>$987,500.

so, gain on sale = sale price - book value

=>$1,000,000-987,500

=>$12,500.

The following will be the journal entries;

Date	Accounts	Debit	Credit
July 1 year 3	Depreciation expense (245,000 *1/2)	122,500
	Accumulated depreciation		122,500
July 1	Cash	1,000,000
	Accumulated depreciation (see above for calculation)	612,500
	Equipment - computer system		1,600,000
	Gain on sale of equipment		12,500