Question

# On January 1, 2013, Jane received \$52,000 for used equipment. The equipment was originally purchased on...

On January 1, 2013, Jane received \$52,000 for used equipment. The equipment was originally purchased on January 1, 2009, and cost \$80,000. Jane expected a useful life of 10 years and salvage value of \$5,000. It was depreciated using the straight-line method. The journal entry to record the sale would include which of the following? Assume the machine was purchased on January 1, 2009 and depreciated using the straight-line method.

Loss of \$9,500.

Gain of \$2,000.

Loss of \$2,000.

Gain of \$9,500.

Answer : Gain \$2,000, Option B

Explanation :

i)Calculation of carrying value on 1- jan - 2013

Depreciation under straight line method for 4 years (i.e., 2009, 2010, 2011, 2012)

= {( Cost of asset - salvage value )÷ life of the asset } × 4

= {(\$80,000 - \$5,000) ÷ 10 } × 4

= (\$75,000 ÷ 10) × 4

= \$7,500 × 4

= \$30,000

ii)Carrying amount of equipment on 1 - jan - 2013 = \$80,000 - \$30,000

= \$50,000

iii)Jane sold equipment at \$ 52,000

Therefore ,

iv)Gain on sale of equipment = \$ 52,000 - \$50,000

= \$2,000.

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