Question

Bowie Company uses a calendar year and the straight line depreciation method. On December 31, 2018, after adjusting entries were posted, Bowie Company sold a machine which was originally purchased on January 1, 2015. The historical cost was $22,000, the salvage value assumed was $1,000 and the original estimated life was five years.. It was sold for $3,800 cash. Using this information, how much should be recorded on December 31 for the Gain or (Loss)?

Answer 1

Answer:

$1,400 should be recorded on December 31 for the Loss

Explanation:

Bowie Company uses straight-line depreciation method, Depreciation Expense each year is calculated by following formula:  

Annual Depreciation Expense = (Cost of machine − Salvage Value)/Useful Life = ($22,000-$1,000)/5 = $4,200

The machine was originally purchased on January 1, 2015.

Depreciation Expense for 2015 = Depreciation Expense for 2016 = Depreciation Expense for 2017 = Depreciation Expense for 2018 = $4,200

Accumulated depreciation  at December 31, 2018 = $4,200 x 4 = $16,800

Carrying amount of the machine = $22,000 - $16,800 = $5,200

Sales price - Carrying amount of the machine = $3,800 - $5,200 = -$1,400<0

The company recorded loss on the sale $1,400