Question

On May 1, 2015, Pinkley Company sells office furniture for $300,000 cash. The office furniture originally cost $750,000 when purchased on January 1, 2008. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $75,000. What gain should be recognized on the sale?

Answer 1

Answer:

$45,000

Explanation:

Data provided in the question:

Selling cost of the furniture on May 1, 2015 = $300,000

Original cost of the machine on January 1, 2008 = $750,000

Depreciable Life of the furniture = 10 years

Salvage value = $75,000

Now,

Annual depreciation = $\frac{\textup{Purchasing cost - salvage value}}{\textup{life}}$

or

Annual depreciation = $\frac{\textup{750,000 - 75,000}}{\textup{10}}$

or

Annual depreciation = $67,500 per year

The total duration from the date of purchase to date of selling

= 7 years 4 months

or

= 7 × 12 + 4 months

= 88 months

= $\frac{88}{12}$ years

therefore,

The total accumulated depreciation till the date of sale

= Annual depreciation × Duration

= $67,500 × $\frac{88}{12}$

= $495,000

Thus,

The book value on  May 1, 2015

= Purchasing cost - Accumulated depreciation

= $750,000 - $495,000

= $255,000

Hence,

The gain recognized = Selling cost - Book value

= $300,000 - $255,000

= $45,000