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25 June, 05:09

Mercury Inc. purchased equipment in 2019 at a cost of $400,000. The equipment was expected to produce 700,000 units over the next five years and have a residual value of $50,000. The equipment was sold for $210,000 part way through 2021. Actual production in each year was: 2019 = 100,000 units; 2020 = 160,000 units; 2021 = 80,000 units. Mercury uses units-of-production depreciation, and all depreciation has been recorded through the disposal date.

Prepare the journal entry to record the sale.

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  1. 25 June, 06:28
    0
    See explanation section

    Explanation:

    We know,

    Annual depreciation rate under Units-of-production = Depreciable amount/Overall (expected) production

    Given,

    Purchase value = $400,000

    Residual value = $50,000

    Expected production = 700,000 units

    Depreciable Amount = $ (400,000 - 50,000) = $350,000

    Annual depreciation rate = $350,000/700,000

    Depreciation rate = $0.50

    Thrrefore, Accumulated depreciation from 2019 to 2021 = (100,000 + 160,000 + 80,000) * $0.50

    = $170,000

    We know, Book value of asset = Cost price - Accumulated depreciation

    Book value = $400,000 - $170,000 = $230,000

    Again, Loss on sale of equipment = Book value - Sales price

    Loss on sale of equipment = $230,000 - $210,000

    Loss on sale of equipment = $20,000

    The journal entry to record the sale =

    Debit Cash $210,000

    Debit Accumulated Depreciation $170,000

    Debit Loss on sale $20,000

    Credit Equipment $400,000
  2. 25 June, 09:00
    0
    YY 2021, disposal of equipment:

    Dr Cash 210,000

    Dr Accumulated depreciation 170,000

    Dr Loss on disposal 20,000

    Cr Equipment 400,000

    Explanation:

    depreciation per unit produced = (cost - resale value) / estimated production = ($400,000 - $50,000) / 700,000 units = $350,000 / 700,000 units = $0.50 per unit

    the journal entries should be:

    XX 2019, purchase of equipment:

    Dr Equipment 400,000

    Cr Cash 400,000

    December 31, 2019, equipment depreciation:

    Dr Depreciation expense 50,000 ( = 100,000 units x $0.50)

    Cr Accumulated depreciation - equipment 50,000

    December 31, 2020, equipment depreciation:

    Dr Depreciation expense 80,000 ( = 160,000 units x $0.50)

    Cr Accumulated depreciation - equipment 80,000

    YY, 2019, equipment depreciation:

    Dr Depreciation expense 40,000 ( = 80,000 units x $0.50)

    Cr Accumulated depreciation - equipment 40,000

    YY 2021, disposal of equipment:

    Dr Cash 210,000

    Dr Accumulated depreciation - equipment 170,000

    Dr Loss on disposal 20,000

    Cr Equipment 400,000
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