New Morning Bakery is in the process of closing its operations. It sold its two-
ID: 2403889 • Letter: N
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 $500,000. The ovens originally cost $690,000, had an estimated service life of 10 years, and an estimated residual value of $40,000. New Morning Bakery uses the straight-line depreciation method for all equipment.
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.
3. What 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.)
Accumulated depreciation2. Calculate the book value of the ovens at the end of the second year.
Explanation / Answer
1) computation of accumulated depreciation at the end of the second year:-
Depreciation computation = (cost of asset - salvage value)/ estimated useful life
Therefore, Depreciation = (6,90,000-40,000)/10
Depreciation = 65,000 per annum
Accumulated depreciation for 2 years is the sum of depreciation for 2years
Depreciation for 2 years = 65,000*2 = 1,30,000
Therefore, Accumulated depreciation at the end of 2nd year is 1,30,000
2) Computation of Book value of the asset:-
Original cost of the asset at the time of purchase = $ 6,90,000
Accumulated depreciation at the end of 2 years = $1,30,000
Book value of the asset at the end of 2 years = $ 6,90,000 - $1,30,000
Therefore, Book value of the asset = $ 5,60,000
3) Computation of Loss or Gain at the time of sale :-
Book value of the asset at the end of 2nd year is $ 5,60,000
Sale value of the asset at the end of 2nd year is $ 5,00,000
* Since, sale value is less than the book value of the asset at the time of sale, Loss is arising on the
Loss will arise at the time of sale.
Loss on the sale of the asset = sale value - book value at the time of sale
= $ 5,00,000 - $ 5,60,000
= ($60,000)
Therefore, loss on the sale of the asset is $60,000
4) Journal entry for the sale of asset:-
Transaction
General Journal
Debit
Credit
1.
Cash A/c
To Ovens A/c
$ 5,00,000
$ 5,00,000
2.
P& L A/c (Loss on Oven A/c)
To Ovens A/c
$ 60,000
$ 60,000
.
Transaction
General Journal
Debit
Credit
1.
Cash A/c
To Ovens A/c
$ 5,00,000
$ 5,00,000
2.
P& L A/c (Loss on Oven A/c)
To Ovens A/c
$ 60,000
$ 60,000