A company purchased a tractor at a cost of $36,000 and sold it three years later for $18,000. The company recorded depreciation using the straight-line method, a five-year service life, and a $2,000 residual value. Tractors are included in the Equipment account.

1-Record the sale of equipment.

2-Assume the tractor was sold for $11,200 instead of $18,000. Record the sale.

1.

Cash $18000 Dr

Accumulated depreciation-Equipment $20400 Dr

Equipment Account-Tractor $36000 Cr

Gain on disposal $2400 Cr

2.

Cash $11200 Dr

Accumulated depreciation-Equipment $20400 Dr

Loss on Disposal $4400 Dr

Equipment Account-Tractor $36000 Cr

Explanation:

a.

The straight line method of depreciation charges equal or constant amount of depreciation expense through out the useful life of an asset. The formula for depreciation expense per year under straight line method is,

Depreciation expense per year = (Cost - Residual value) / estimated useful life

Depreciation expense per year = (36000 - 2000) / 5 = $6800

The accumulated depreciation after three years = 6800 * 3 = $20400

After three years, the tractor had a Carrying value of = 36000 - 20400 = $15600

Thus, there is a gain on disposal of = 18000 - 15600 = 2400

b.

If the cash received from sale or disposal was $11200. Then there will be a loss on disposal as carrying value is greater than the cash received.

The loss on disposal = 11200 - 15600 = 4400 loss