New Morning Bakery is in the process of closing its operations. It sold its two-year-old bakery ovens to Great Harvest Bakery for $700,000. The ovens originally cost $910,000, had an estimated service life of 10 years, and an estimated residual value of $60,000. New Morning Bakery uses the straight-line depreciation method for all equipment.

Required:
a. Calculate the balance in the accumulated depreciation account at the end of the second year.
b. Calculate the book value of the ovens at the end of the second year.
c. What is the gain or loss on the sale of the ovens at the end of the second year?
d. Record the sale of the ovens at the end of the second year.

Explanation:

The computations are as follows

1. For computing the accumulated depreciation balance, first we have to determine the depreciation expense using the straight line method

= (Original cost - residual value) ÷ (expected service life)

= ($910,000 - $60,000) ÷ (10 years)

= ($850,000) ÷ (10 years)  

= $85,000

In this method, the depreciation is same for all the remaining useful life

So, the accumulated depreciation balance is

= $85,000 × 2 years

= $170,000

2. Now the book value is

= Original cost - accumulated depreciation

= $910,000 - $170,000

= $740,000

c. Now the gain or loss is

= Book value - cash received

= $740,000 - $700,000

= $40,000 loss

d. And, the journal entry is

Cash $700,000

Accumulated depreciation $170,000

Loss on sale of oven $40,000

      To Oven $910,000

(Being the sale of the oven is recorded)

Based on the information given, the correct answers will be $170,000 ; $740,000 and $40,000 loss

The depreciation expense will be:

= (Original cost - residual value) / (expected service life)

= ($910,000 - $60,000) / (10 years)

= ($850,000) / (10 years)  

= $85,000

Therefore, the accumulated depreciation balance will be:

= $85,000 × 2 years

= $170,000

2. The book value will be:

= Original cost - Accumulated depreciation

= $910,000 - $170,000

= $740,000

The gain or loss will be calculated thus

= Book value - cash received

= $740,000 - $700,000

= $40,000

Lastly, the journal entry will be:

Dr Cash $700,000

Dr Accumulated depreciation $170,000

Dr Loss on sale of oven $40,000

Cr Oven $910,000

(Being the sale of the oven is recorded)

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