Question

Jing Company was started on January 1, Year 1 when it issued common stock for $26,000 cash. Also, on January 1, Year 1 the company purchased office equipment that cost $15,000 cash. The equipment was delivered under terms FOB shipping point, and transportation cost was $1,100. The equipment had a five-year useful life and a $5,500 expected salvage value. Assume that Jing Company earned $15,800 cash revenue and incurred $10,000 in cash expenses in Year 3. Using straight-line depreciation and assuming that the office equipment was sold on December 31, Year 3 for $8,300, the amount of net income or (loss) appearing on the December 31, Year 3 income statement would be:

Answer 1

Solution:

Cost of office equipment = $15,000 + $1,100 = $16,100

Salvage value = $5,500

Useful life = 5 years

Annual depreciation - SLM = ($16,100 - $5,500) /5 = $2,120

Depreciation expense for 3 years = $2,120*3 = $6,360

Book value at the end of year 3 = $16,100 - $6,360 = $9,740

Sale value of equipment = $8,300

Loss on disposal of equipment = $9,740 - $8,300 = $1,440

Amount of net income or (loss) appearing on December 31, year 3 income statement = Cash revenue - Cash expenses - Depreciation - Loss on disposal of equipment

= $15,800 - $10,000 - $2,120 - $1,440 = $2,240