Asset Disposal

Assume that Gonzalez Company purchased an asset on January 1, 2015, for $40,000. The asset had an estimated life of six years and an estimated residual value of $4,000. The company used the straight-line method to depreciate the asset. On July 1, 2017, the asset was sold for $27,690.

Required:

1. Identify and analyze the effect of the transaction for depreciation for 2017.

Activity	Operating
Accounts	Depreciation Expense Increase, Accumulated Depreciation - Asset Increase
Statement(s)	Balance Sheet and Income Statement

Feedback

Depreciation for 2015 to 2017: the straight-line method of depreciation allocates cost of the asset evenly over time. Set up a T account for accumulated depreciation. Depreciation journal entry: Record depreciation for 6 months updating for sale of asset.

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

Depreciation Expense

Accumulated Depreciation - Asset

Feedback

Partially correct

Identify and analyze the effect of the sale of the asset.

Activity	Investing
Accounts	Accumulated Depreciation - Asset Decrease, Cash Increase, Asset Decrease, Gain on Sale of Asset Increase
Statement(s)	Balance Sheet and Income Statement

Feedback

Record sale: Book value = asset acquisition cost (amount recorded in account) less the accumulated depreciation. Determine the gain or loss. Increase Cash for amount received. Remove the asset account and associated Accumulated Depreciation account.

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

Feedback

Incorrect

2. How should the gain or loss on the sale of the asset be presented on the income statement?

The gain or loss should appear in the Other Income/Expense category of the income statement to indicate that it is not part of the normal operating activity of the company.

Feedback

Correct

Feedback

Partially correct