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.

Answer 1

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

ANSWER:

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