Question

Alliance Products purchased equipment that cost $120,000. It had an estimated useful life of four years and no residual value. The equipment was depreciated by the straight-line method and was sold at the end of the third year of use for $25,000 cash. Alliance should record:

Answer 1

Answer:

Alliance should record a loss of $5000.

Explanation:

Depreciation : The depreciation is the amount which is charged every year. It is a decrease value in the asset due to obsolescence, tear and wear value, usage of time, etc.

There are many methods for calculation the depreciation such as straight line method (SLM), Written down value method (WDV) and many more.

In the question, the straight line method is used.

In straight line method, the deprecation is charged with same value over the useful life of asset.

So, the calculation of depreciation is given below:

Since,

The purchase amount of equipment = $120,000

Useful life  = 4 years

Salvage value = 0

Sale value at the end of the third year = $25,000 cash.

By using above information, we have to calculate the depreciation for 3 years as in the end of the 3 year, the asset is sold.

Depreciation Formula for SLM method  = (Purchase cost- Salvage value) ÷ useful life

=  ($120,000 - 0) ÷ 4

= $30,000

So, the amount of depreciation for all year is $30,000

Depreciation for 1 year = $120,000 - $30,000 = $90,000

Depreciation for 2nd year = $90,000 - $30,000 = $60,000

Depreciation for 3rd year = $60,000 - $30,000 - $25,000 = -$5000

In the 3rd year, the alliance have a loss of $5000 after selling asset.

Hence, Alliance should record a loss of $5000.