Question

On January 1, 2019, Chace Instruments sold a depreciable asset for cash of $400,000, and recognized a gain of $60,000. The asset had been purchased on January 1, 2014 with an estimated useful life of 10 years, and no salvage value. The asset was depreciated using the straight-line method.

What must have been the original cost of the asset?

Select one:

A. $800,000

B. $680,000

C. $920,000

D. $660,000

Answer 1

B. 680,000

Explanation-

Straight line method = ( cost - salvage value) / useful life

Sale value = $ 400,000

Gain = $ 60,000

Book value at January 2019 = $400,000- 60,000 = 340,000

Cost of Asset purchased on January 2014 = X

Useful life = 10 years

Depreciation from 2014 to 2018 = 5 years

So depreciation per year was = 340,000/5×10 = $ 680,000

680,000/10 = $ 68,000

Total amount of depreciation upto date charged = 68,000×5 = $ 340,000

Total cost at the time of purchase of asset = $ 680,000

As 5 years depreciation was charged on asset and having total useful life of 10 years. Salvage value was nil. So the book value as at January 2019 was half of the purchase value due to depreciation charged for 5 years.