Question

A piece of equipment is purchased by Great Notch Corporation on January 1 for $46,200. It is expected to have a useful life of four years after which it will have an expected residual value of $6,300. The company uses the straight-line method of depreciation for their equipment. If it is sold for $32,600 exactly two years after it is purchased, the company will record a: Multiple Choice gain of $7,250. gain of $6,350. loss of $6,350. loss of $7,250.

Answer 1

Answer:

gain of $6,350.

Explanation:

Depreciation expense each year = (cost of asset - residual value) / useful life

($46,200 - $6,300) / 4 = $9,975

Depreciation expense after two years = $9,975 x 2  = $19,950

Value of the equipment in two years = $46,200 -  $19,950 = $26,250

If the equipment is sold for  $32,600, the equipment would be sold at a profit

Profit =  $32,600 - $26,250 = $6350