Question

QUESTION 5

1. Merle Company operates a skateboard repair shop near USC.  Merle purchased this business on January 1, Year 1, at a cost of $28,000.  [$ values in thousands for ease of expression.]  This price included the land, building and equipment.  Merle started operations on August 1, Year 1.

   The cost basis of the land was properly determined to be $12,000.  The cost basis of the building and equipment were properly determined to be $11,000 and $5,000, respectively.  Merle properly uses the double-declining balance depreciation method for the building and the units of activity method for the equipment in its financial accounting records.  The estimated economic lives of the building and the equipment are 15 years and 4,000 repair jobs, respectively.  The estimated salvage values of the building and the equipment are $6,000 and $2,000, respectively.

   Merle performed repair jobs in Years 1 through 4 as follows:

   Year 1: 100 jobs,

   Year 2: 300 jobs and

   Year 3: 400 jobs.

   On January 1, Year 4, before any depreciation was recorded for Year 4, Merle accepted a cash offer and sold the property for $33,000 that same day.  The sale price of $33,000 was properly allocated to land, building and equipment, respectively, as follows:  $14,500, $16,000 and $2,500.

   Assume all accounting for depreciation had been properly done in Years 1, 2 and 3.

   How much Gain should Merle recognize on the sale of this Equipment? ________ [Use no $ signs or commas]

Answer 1