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? Select all that apply.
Depreciation expense
Fixed assets
Sales income
Gain/loss on sale of asset
Accumulated depreciation
The correct answer and explanation is:
The correct accounts that would be used to record the disposal of the asset are:
- Fixed assets
- Gain/loss on sale of asset
- Accumulated depreciation
Explanation
When a company disposes of a fixed asset, such as a computer, it must remove the asset and its associated accumulated depreciation from its books. Additionally, any difference between the book value of the asset and the proceeds from the sale is recorded as a gain or loss on the sale of the asset. Let’s analyze each account:
- Fixed assets: The computer is a fixed asset. When it is sold, the company must credit (reduce) the “Fixed assets” account by the original purchase price of $1,500 to remove it from the balance sheet.
- Accumulated depreciation: Straight-line depreciation is applied over the estimated service life of 5 years. After 3 years, the accumulated depreciation would be 1,5005×3=900\frac{1,500}{5} \times 3 = 900. This amount represents the total depreciation that has been charged to expense over the asset’s life. The company must debit (remove) the “Accumulated depreciation” account for $900.
- Gain/loss on sale of asset: The book value of the asset at the time of sale is its original cost minus accumulated depreciation, which is 1,500−900=6001,500 – 900 = 600. The computer was sold for $300, resulting in a loss of 600−300=300600 – 300 = 300. This loss is recorded in the “Gain/loss on sale of asset” account.
Why other accounts are not used:
- Depreciation expense is not used because it applies only to the ongoing depreciation of the asset during its service life. The expense is not recorded at the time of disposal.
- Sales income is not applicable because selling a fixed asset is not part of the company’s regular revenue-generating activities.
By using these accounts, the disposal is accurately recorded in the financial statements.