Question

New Morning Bakery is in the process of closing its operations. It sold its two-year-old bakery ovens to Great Harvest Bakery for $700,000. The ovens originally cost $910,000, had an estimated service life of 10 years, and an estimated residual value of $60,000. New Morning Bakery uses the straight-line depreciation method for all equipment.

Required:
1. Calculate the balance in the accumulated depreciation account at the end of the second year.
2.Calculate the book value of the ovens at the end of the second year.
3What is the gain or loss on the sale of the ovens at the end of the second year?
4. Record the sale of the ovens at the end of the second year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer:

1. $170,000

2.$740,000

3. Loss on Sale $ 40,000

4.

Cash $700,000 (debit)

Loss on Sale of Equipment $ 40,000 (debit)

Accumulated Depreciation $170,000 (debit)

Equipment $910,000 (credit)

Explanation:

Straight line method assumes a constant depreciation charge over the useful life of the asset.

Depreciation Charge = (Cost - Salvage Value) / Number of Useful Life

                                   = ($910,000 - $60,000) /  10

                                   = $85,000

Accumulated Depreciation Balance  end of the second year :

Depreciation Charge Year 1 = $85,000

Depreciation Charge Year 2 = $85,000

Total                                       = $170,000

Book value of the ovens at the end of the second year :

Cost                                                = $910,000

Less Accumulated Depreciation = ($170,000)

Book Value                                    = $740,000

Gain or loss on the sale of the ovens at the end of the second year

Gain or (loss)  = Book Value - Proceeds

                        = $740,000 - $700,000

                        = ($ 40,000)

Record the sale of the ovens at the end of the second year

Cash $700,000 (debit)

Loss on Sale of Equipment $ 40,000 (debit)

Accumulated Depreciation $170,000 (debit)

Equipment $910,000 (credit)