Mercury Inc. purchased equipment in 2019 at a cost of $400,000. The equipment was expected to produce 700,000 units over the next five years and have a residual value of $50,000. The equipment was sold for $210,000 part way through 2021. Actual production in each year was: 2019 = 100,000 units; 2020 = 160,000 units; 2021 = 80,000 units. Mercury uses units-of-production depreciation, and all depreciation has been recorded through the disposal date.

Prepare the journal entry to record the sale.

See explanation section

Explanation:

We know,

Annual depreciation rate under Units-of-production = Depreciable amount/Overall (expected) production

Given,

Purchase value = $400,000

Residual value = $50,000

Expected production = 700,000 units

Depreciable Amount = $ (400,000 - 50,000) = $350,000

Annual depreciation rate = $350,000/700,000

Depreciation rate = $0.50

Thrrefore, Accumulated depreciation from 2019 to 2021 = (100,000 + 160,000 + 80,000) * $0.50

= $170,000

We know, Book value of asset = Cost price - Accumulated depreciation

Book value = $400,000 - $170,000 = $230,000

Again, Loss on sale of equipment = Book value - Sales price

Loss on sale of equipment = $230,000 - $210,000

Loss on sale of equipment = $20,000

The journal entry to record the sale =

Debit Cash $210,000

Debit Accumulated Depreciation $170,000

Debit Loss on sale $20,000

Credit Equipment $400,000

YY 2021, disposal of equipment:

Dr Cash 210,000

Dr Accumulated depreciation 170,000

Dr Loss on disposal 20,000

Cr Equipment 400,000

Explanation:

depreciation per unit produced = (cost - resale value) / estimated production = ($400,000 - $50,000) / 700,000 units = $350,000 / 700,000 units = $0.50 per unit

the journal entries should be:

XX 2019, purchase of equipment:

Dr Equipment 400,000

Cr Cash 400,000

December 31, 2019, equipment depreciation:

Dr Depreciation expense 50,000 ( = 100,000 units x $0.50)

Cr Accumulated depreciation - equipment 50,000

December 31, 2020, equipment depreciation:

Dr Depreciation expense 80,000 ( = 160,000 units x $0.50)

Cr Accumulated depreciation - equipment 80,000

YY, 2019, equipment depreciation:

Dr Depreciation expense 40,000 ( = 80,000 units x $0.50)

Cr Accumulated depreciation - equipment 40,000

YY 2021, disposal of equipment:

Dr Cash 210,000

Dr Accumulated depreciation - equipment 170,000

Dr Loss on disposal 20,000

Cr Equipment 400,000