Question

G CO. records 15,000 per year straight-line depreciation on its warehouse. At December 31, 2016, the warehouse cost was $140,000 and $65,000 of depreciation had been taken out. On April 1, 2017, a fire destroyed the warehouse. The insurance company paid G CO. $78,000 to cover the involuntary conversion. G CO. should recognize a

**THE CORRECT ANSWER IS B $6,750 CAN SOMEONE EXPLAIN WHY AND SHOW THE STEPS PLEASE**

a. $62,000 loss

b. $6,750 gain

c. $3,000 gain

d. $18,000 gain

Answer 1

b.$ 6,750 gain

Explanation:

At December 31,2016 cost of warehouse is taken as $ 140,000 and depreciation is $ 65,000.

Book value of warehouse on January 1

= $ 140,000 -$ 65,000

=$ 75,000.

As fire destroyed it on April 1,2017. It's book value on April 1 must be calculated. For that 3 months depreciation that is from January 1to April 1 will be subtracted from $ 75,000.

Depreciation for 3 months = $15,000 X 3/12

=$ 3,750

Book value of warehouse on April 1,2017

= $75,000- $ 3,750

=$71,250

Gain = Amount received from insurance company - Book value on April 1 2017

= $78,000- $ 71,250

=$ 6,750