ABO purchased a truck at the beginning of 2018 for $140,000. They sold the truck at the end of 2019 for $95,000. If the expected useful life of the truck was six years with a residual value of $20,000 and ABO uses straight-line depreciation, which of the following is true regarding the entry to record the sale of the truck?

A. Credit Gain $5,000
B. Debit Loss $5,000
C. Credit Accumulated Depreciation $40,000
D. Credit Equipment $100,000

B. Debit Loss $5,000

Explanation:

The following should take place on the Sale of Truck or any PPE item :

Journal to record the disposal of the truck ;

Cash $95,000 (debit)

Accumulated Depreciation $ 40,000 (debit)

Loss on Sale of Truck $ 5,000 (debit)

Truck $  $140,000 (credit)

Accumulated Depreciation Calculation :

Depreciation = (Cost - Residual Value) / Useful Life

                      = ( $140,000 - $20,000) / 6 years

                      =  $ 20,000

Accumulated Depreciation

2018 = $ 20,000

2019 = $ 20,000

Total = $ 40,000

B) Debit Loss $5,000

Explanation:

we need to calculate the depreciation expense:

depreciation expense per year = (total purchase cost - residual value) / useful life

= ($140,000 - $20,000) / 6 years = $120,000 / 6 = $20,000 per year

since the truck was sold two years later, $20,000 x 2 = $40,000 has to be reduced from its book value:

book value = $140,000 - $40,000 (depreciation) = $100,000

the truck was sold for $95,000:

gain/loss = sales value - book value = $95,000 - $100,000 = -$5,000 or $5,000 loss

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