CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

Assume that the depreciation on a machine costing $18,000 has been recorded for nine years at the rate of $1,200 per year. If the machine is sold in the middle of the tenth year for $7,000, what should be the journal entry?
Correct Answer: Since the sale happened in the middle of the year, a $600 depreciation should be made that year.
  • debit cash for $7,000
  • debit accumulated depreciation for $11,400 (9 x $1,200 + $600)
  • credit machine for $18,000
  • credit Gain on Disposal of Machinery for $400

User Contributed Comments 14

User Comment
vincenthuang where does the $600 come from?
min It's the depreciation for half a year in the tenth year.
Done where does the credit gain on disposal come from?
mtcfa Yes how do you know that the $400 is a gain? What if the market value was $10,000. It would then have been sold at a loss.
shasha mtcfa: It must be a gain. The accounting cost of the machine at the time of the transaction was 9.5 x 1200 = 11,400, leaving a balance of 6,600.
wundac 18400-7000-10800-600=400
cfaajay 18000 + x = 11400 + 7000
x = 400 credit gain on disposal
shiva5555 I hate accounting.
thekobe just compare 18,000 vs 18,400
moneyguy is gain on disposal an asset account? CREDIT gain on disposal is confusing to me for some reason.
johntan1979 Cash from sale of asset + Accumulated Depreciation - Cost of asset = Gain or loss
Yrazzaq88 This is too easy.

Let's start with the easier parts:
Cash = 7K (debit)
Machine = 18K value (credit)

Now we need accumulated depreciation
1200 per year x 9.5=11,400 (debit)

Profit on machine = Machine (cost value) - Accumlated Dep = $6,600

Cash (what you received) was 7K(debit), which was more than $6,600 (the intended value)... Therefore, we received a profit of $400(credit)
GBolt93 Moneyguy, gains/losses are an I/S account not B/S, so you should credit increases (gains) and debit decreases (losses). Think about a regular sale where you might debit cash or unearned revenue (BS accounts) and credit revenue (I/S account).
gc1210 Why would debit means what you received? You gain 7K cash shouldn't you credit 7K cash?
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