Question

An asset was acquired on October 1, 2018, for $78,000 with an estimated 5-year life and $13,000 residual value. The company uses units-of-production depreciation and expects the asset to produce 20,000 units. Calculate the gain or loss if the asset was sold on March 31, 2021, for $58,000. Actual production was: 2018=500 units; 2019=3,000 units; 2020=3,500 units; 2021=1,000 units.

		$19,000 gain.
		$11,200 gain.
		$6,000 gain.
		$12,500 gain.

Answer 1

• Workings

A	Cost	$            78,000.00
B	Residual Value	$            13,000.00
C=A - B	Depreciable base	$            65,000.00
D	Usage	20,000 units
E = C/D	Depreciation per units	$                       3.25

Year	Book Value	Usage	Depreciation expense = Usage x $ 3.25	Ending Book Value	Accumulated Depreciation
2018	$              78,000.00	500	$            1,625.00	$             76,375.00	$           1,625.00
2019	$              76,375.00	3,000	$            9,750.00	$             66,625.00	$        11,375.00
2020	$              66,625.00	3,500	$         11,375.00	$             55,250.00	$        22,750.00
2021	$              55,250.00	1,000	$            3,250.00	$             52,000.00	$        26,000.00

• As you can see that Ending Book Value at end of 2021 = $ 52,000.
  The machine is sold for $ 58,000 Cash.
  This means that MORE Cash is received that its Book Value.
  There is a GAIN on sale.
  Gain on Sale = $ 58000 - $ 52000 = $ 6,000
• Correct Answer = Option #3: $ 6,000 Gain