Question

On January 1, 2016, Wheeler, Inc. purchased some equipment for $3,900. The equipment had an estimated life of five years and an expected residual value of $200. On July, 1, 2018, the equipment was sold for $1,000. Wheeler uses straight-line depreciation. Refer to Exhibit 11-03, what was the amount of the loss or gain recognized in the sale?

Answer 1

Answer:

The amount of the loss was recognized in the sale $1,050

Explanation:

Companies frequently sell plant assets to dispose them. To recognize gain or loss on disposal:

First, the company calculates the carrying amount of the asset by using the original cost of the asset, minus all accumulated depreciation and any accumulated impairment charges.

Then, subtract this carrying amount from the sale price of the asset. If the remainder is positive, it is a gain and if the remainder is negative, it is a loss .

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

Depreciation Expense = (Cost of asset − Residual Value )/Useful Life = ($3,900-$200)/5 = $740

From January 1, 2016 to July, 1, 2018, the equipment has been used for 2.5 years. The Accumulated depreciation = $740 x 2.5 = $1,850

On July, 1, 2018, the carrying amount of the asset = $3,900 - $1,850 = $2,050

Sale price - Carrying amount of the asset = $1,000 - $2,050  = -$1,050

=> The company recognized loss on disposal $1,050