Page 450 - Accounting Principles (A Business Perspective)

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Sales price 35,000
Gain realized $ 4,000
The journal entry to record the sale is:
Cash (+A) 35,000
Accumulated Depreciation—Equipment (+A) 14,000
Equipment (-A) 45,000
Gain on Disposal of Plant Assets (+SE) 4,000
To record sale of equipment at a price greater than
book value.
If on the other hand, the company sells the equipment for USD 28,000, it realizes a loss of USD 3,000 (USD
31,000 book value—USD 28,000 sales price). The journal entry to record the sale is:
Cash (+A) 28,000
Accumulated Depreciation—Equipment (+A) 14,000
Loss from Disposal of Plant Asset (-SE) 3,000
Equipment (-A) 45,000
To record the sale of equipment at a price less than
book value.
If a firm sells the equipment for USD 31,000, no gain or loss occurs. The journal entry to record the sale is:
Cash (+A) 31,000
Accumulated Depreciation—Equipment (+A) 14,000
Equipment (-A) 45,000
To record sale of equipment at a price equal to
book
value.

Accounting for depreciation to date of disposal When selling or otherwise disposing of a plant asset, a
firm must record the depreciation up to the date of sale or disposal. For example, if it sold an asset on April 1 and
last recorded depreciation on December 31, the company should record depreciation for three months (January 1-
April 1). When depreciation is not recorded for the three months, operating expenses for that period are
understated, and the gain on the sale of the asset is understated or the loss overstated.
To illustrate, assume that on 2011 August 1, Ray Company sold a machine for USD 1,500. When purchased on
2003 January 2, the machine cost USD 12,000; Ray was depreciating it at the straight-line rate of 10 per cent per

year. As of 2010 December 31, after closing entries were made, the machine's accumulated depreciation account
had a balance of USD 9,600. Before determining a gain or loss and before making an entry to record the sale, the
firm must make the following entry to record depreciation for the seven months ended 2011 July 31:
July 31 Depreciation Expense—Machinery (-SE) 700
Accumulated Depreciation—Machinery (-A) 700
To record depreciation for seven months
[$12,000 X 0.10 X (7/12)]

An accountant would compute the USD 200 loss on the sale as follows:
Machine cost $ 12,00
0
Accumulated depreciation ($9,600 + 10,30
$700) 0
Book value $ 1,700
Sales price 1,500

Accounting Principles: A Business Perspective 451 A Global Text