Question

Question: Garcia Co. owns equipment that cost \(76,800, with accumulated depreciation of \)40,800. Garcia sells the equipment for cash. Record the sale of the equipment under the following three separate cases assuming Garcia sells the equipment for (1) \(47,000 cash, (2) \)36,000 cash, and (3) $31,000 cash

Short answer

1. If the equipment is sold for $47,000 cash, then there will be a profit of $11,000.
2. If the equipment is sold for $36,000 cash, there will be no profit or gain.
3. If the equipment is sold for $31,000 cash, then there will be a loss of $ 5,000.

Step-by-step solution

Meaning of Depreciation

Depreciation is the overall reduction in the book value of the asset because of its regular use or wear and tear.

(1) Sale for $47,000

Sale above book value: If Gracia Co. receives an amount above the equipment’s book value, a gain on disposal occurs. The entry is

Cash	$47,000
Accumulated depreciation	$40,800
Gain on Disposal of Equipment		$11,000
Equipment		$76,800
(Record sale of equipment for a $11,000 gain.)

(2) Sale for $36,000

Sale at Book Value: If Garcia Co. receives an amount equal to the equipment’s book value, no gain or loss occurs on disposal. The entry is

Cash	$36,000
Accumulated depreciation	$40,800
Equipment		$76,800
(Record sale of equipment for no gain or loss.)

(3) Sale for $31,000

Sale below Book Value: If Garcia Co. receives an amount below the equipment’s book value, a loss on disposal occurs. The entry is

Cash	$31,000
Loss on Disposal of Equipment	$5,000
Accumulated depreciation	$40,800
Equipment		$76,800
(Record sale of equipment for a loss of $5,000.)

Working note:

Calculation of book value

$\begin{array}{rcl}\mathbf{Book}\mathbf{value}& =& C\mathbf{ost}-A\mathbf{ccumulated} depreciation\\ & =& \text{\$}76,800-\text{\$}40,800\\ & =& \$36,000\end{array}$