Question

On January 1, 2018, Dunbar Echo Co. sells a machine for $25,200. The machine was originally purchased on January 1, 2016 for $45,200. The machine was estimated to have a useful life of 5 years and a residual value of $0. Dunbar Echo uses straight-line depreciation. In recording this transaction:

A. a loss of $20,000 would be recorded

B. a gain of $1,920 would be recorded.

C. a loss of $1,920 would be recorded.

D. a gain of $25,200 would be recorded.

Answer 1

ANSWER:

Option C is correct.

Annual depreciation expense = (Cost – Residual value) × (1 ÷ Useful life)

= ($45,200 – $0) × (1 ÷ 5) = $9040

Accumulated depreciation = 2014 depreciation expense + 2015 depreciation expense

= $9040 + $9040

= $18,080

Gain (loss) on disposal = Proceeds from sale – Book value at time of saleGain (loss) on disposal

= Proceeds from sale – (Cost – Accumulated depreciation at time of sale)

= $25,200 – ($45,200 – $18,080)

= ($1,920)

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