Answer:
The gain recognized on the equipment is $6,550
Explanation:
A straight-line depreciation method distributes depreciation costs evenly throughout the useful life of the equipment, and depreciation per year using this method is calculated thus:
Depreciation per year = (Cost of equipment - salvage value) ÷ useful life
= (45,200 - 6,100) ÷ 4 = 39,100 ÷ 4 = $9,775
This means that each year, the machine depreciates by a value of $9,775.
Next, we are given that the machine was sold for $32,200 after two years, to determine if a profit or loss was made, we will calculate the expected residual value after two years, and find the difference between this value and the selling price. The residual value is calculated thus:
Residual value = Cost of equipment - (depreciation per year × number of years used)
Residual value = 45,200 - ( 9,775 × 2 )
Residual value = 45,200 - 19,550 = $25,650
Difference between residual value and selling price = 32,200 - 25,650 = $6,550 (profit was made since the selling price was higher than the value of the equipment)
