Question

A machine was purchased at a cost of $78,000. The equipment had an estimated useful life of five years and a residual value of $3,000. Assuming the equipment was sold at the end of Year 4 for $8,000, determine the gain or loss on the sale of equipment. (Assume the straight-line depreciation method.)
a. a loss of $18,000
b. a loss of $10,000
c. a gain of $10,000
d. a gain of $18,000

Answer 1

Answer:

option (b) a loss of $10,000

Explanation:

Data provided in the question:

Cost of machine = $78,000

Useful life = 5 years

Residual value = $3,000

Selling cost = $8,000

Now,

Annual depreciation = [ cost - Residual value ] ÷ Useful life

= [ $78,000 - $3,000 ] ÷ 5

= $75,000 ÷ 5

= $15,000

Thus,

Accumulated depreciation after 4 years = 4 × $15,000

= $60,000

Therefore,

Book value at the end of 4 years

= Cost - Accumulated depreciation

= $78,000 - $60,000

= $18,000

Now,

Gain/loss = Selling cost - Book value

= $8,000 - $18,000

= - $10,000

Here,

negative sign depicts loss

Hence,

Correct answer is option (b) a loss of $10,000