Question

# Suarez Company uses the straight-line method of depreciation. The company purchased a computer system on January...

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.

INFORMATION GIVEN IN QUESTION:

PURCHASE COST OF COMPUTER = \$ 1,600,000

LIFE = 6 YEARS

SALVAGE = \$ 130,000

METHOD OF DEPRECIATION = STARIGHT LINE METHOD.

SALE PRICE = \$ 1,000,000

Annual Depreciation = ( Cost - Scarp ) / Useful life = ( \$ 1,600,000 - \$ 130,000 ) / 6 years = \$ 245,000

Hence, Depreciation for 6 months in year 3 = Annual depreciation / 2 = \$ 245,000 / 2 = \$ 122,500

Book value of Computer on the date of sale = Cost - Depreciation for 2.5 years = \$1,600,000 - \$ 245,000 - \$ 245,000 - \$122,500 = \$ 987,500

Hence Profit on sale of Computer = Sale price - Book value = \$1,000,000 - \$987,500 = \$12,500

JOURNAL ENTRIES:

a. Depreciation for 6 months in year 3

DEPRECIATION A/C ....................DR. \$ 122,500

TO COMPUTER \$ 122,500

b. Sale of Computer

CASH A/C ...................................DR \$ 1,000,000

TO COMPUTER A/C \$ 987,500

TO PROFIT ON SALE A/C \$ 12,500

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