Answer:
C. A gain of $400
Explanation:
To recognize gain or loss on the transaction:
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.
Amanda Company uses straight-line depreciation, Depreciation Expense each year is calculated by following formula:
Depreciation Expense = (Cost of asset − Residual Value )/Useful Life = ($10,000-$1,000)/5 = $1,800
At the end of the third year:
1. The Accumulated depreciation = $1,800 x 3 = $5,400
2. The carrying amount of the asset = $10,000 - $5,400 = $4,600
Sale price - Carrying amount of the asset = $5,000 - $4,600 = $400 >0
=> The company recognized gain on disposal $400
