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Terra Corporation purchased equipment with a 10-year useful life and zero residual value for $100,000. At the end of the seventh year, the equipment is sold for $20,000. The entry to record this sale will include _______. Assume the straight-line depreciation method is used. (Select all that apply.)Check All That Applya debit to Cash for $20,000a debit to Cash for $20,000a credit to Equipment for $30,000a credit to Equipment for $30,000a credit to Equipment for $100,000a credit to Equipment for $100,000a debit to Loss for $10,000a debit to Loss for $10,000a credit to Gain for $20,000a credit to Gain for $20,000a debit to Accumulated Depreciation for $10,000a debit to Accumulated Depreciation for $10,000a debit to Accumulated Depreciation for $70,000a debit to Accumulated Depreciation for $70,000

Question

Terra Corporation purchased equipment with a 10-year useful life and zero residual value for 100,000.Attheendoftheseventhyear,theequipmentissoldfor100,000. At the end of the seventh year, the equipment is sold for 20,000. The entry to record this sale will include _______. Assume the straight-line depreciation method is used. (Select all that apply.)Check All That Applya debit to Cash for 20,000adebittoCashfor20,000a debit to Cash for 20,000a credit to Equipment for 30,000acredittoEquipmentfor30,000a credit to Equipment for 30,000a credit to Equipment for 100,000acredittoEquipmentfor100,000a credit to Equipment for 100,000a debit to Loss for 10,000adebittoLossfor10,000a debit to Loss for 10,000a credit to Gain for 20,000acredittoGainfor20,000a credit to Gain for 20,000a debit to Accumulated Depreciation for 10,000adebittoAccumulatedDepreciationfor10,000a debit to Accumulated Depreciation for 10,000a debit to Accumulated Depreciation for 70,000adebittoAccumulatedDepreciationfor70,000a debit to Accumulated Depreciation for 70,000

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Solution

The correct entries to record the sale of the equipment would be:

  1. A debit to Cash for $20,000: This is the amount of cash that Terra Corporation received from the sale of the equipment.

  2. A credit to Equipment for $100,000: This is the original cost of the equipment that is being removed from the books.

  3. A debit to Accumulated Depreciation for 70,000:Thisistheamountofdepreciationthathasbeenaccumulatedoverthesevenyearsoftheequipment′suse.Theannualdepreciationis70,000: This is the amount of depreciation that has been accumulated over the seven years of the equipment's use. The annual depreciation is 10,000 (100,000cost/10yearsusefullife),soaftersevenyears,theaccumulateddepreciationis100,000 cost / 10 years useful life), so after seven years, the accumulated depreciation is 70,000.

  4. A debit to Loss for 10,000:Thisisthelossonthesaleoftheequipment.Thebookvalueoftheequipmentatthetimeofsaleis10,000: This is the loss on the sale of the equipment. The book value of the equipment at the time of sale is 30,000 (100,000cost−100,000 cost - 70,000 accumulated depreciation), and since it was sold for only 20,000,thereisalossof20,000, there is a loss of 10,000.

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