A company bought a computer for $1,500. Three years later, the computer was sold for $300. Assuming a 5-year estimated service life and straight line depreciation, which account(s) would be used to record the disposal of the asset?
The Correct Answer and Explanation is :
To record the disposal of the computer, the following accounts would be used:
- Accumulated Depreciation
- Computer (Asset)
- Loss on Disposal of Asset (if applicable)
Explanation:
When a company purchases an asset, such as a computer, it is depreciated over time. The straight-line method of depreciation assumes that the asset loses an equal amount of value each year. In this case, the computer was bought for $1,500 with an estimated service life of 5 years. The straight-line depreciation would be calculated as follows:
[
\text{Annual Depreciation} = \frac{\text{Cost of Asset} – \text{Salvage Value}}{\text{Useful Life}} = \frac{1500 – 0}{5} = 300 \text{ per year}
]
Thus, the computer depreciates by $300 each year. After 3 years, the total accumulated depreciation would be:
[
\text{Accumulated Depreciation} = 300 \times 3 = 900
]
At the end of 3 years, the book value of the computer is:
[
\text{Book Value} = \text{Cost} – \text{Accumulated Depreciation} = 1500 – 900 = 600
]
The computer is then sold for $300, which is less than its book value. The loss on disposal would be:
[
\text{Loss on Disposal} = \text{Book Value} – \text{Sale Price} = 600 – 300 = 300
]
The accounting entries required to record the disposal would be as follows:
- Accumulated Depreciation (Debit): This account is debited to remove the accumulated depreciation on the asset. In this case, it would be $900.
- Computer (Asset) (Credit): The asset account is credited to remove the computer from the books, valued at its original purchase price of $1,500.
- Cash (Debit): Cash or the equivalent account is debited for the $300 received from the sale of the computer.
- Loss on Disposal of Asset (Debit): Since the computer was sold for less than its book value, the company records a loss of $300 in this account.
By making these journal entries, the company effectively removes the computer and its related depreciation from the books, while accounting for the loss incurred from the sale.