Question

New Morning Bakery is in the process of closing its operations. It sold its two-year-old bakery ovens to Great Harvest Bakery for $650,000. The ovens originally cost $855,000, had an estimated service life of 10 years, had an estimated residual value of $55,000, and were depreciated using straight-line depreciation. Complete the requirements below for New Morning Bakery.

3. What is the gain or loss on the sale of the ovens at the end of the second year?
  

Answer 1

3. Depreciation expense per year = (cost - salvage value) / years

= ($855,000 - $55,000) / 10 years

= $800,000 / 10

= $80,000

Accumulated Depreciation expense for 2 years = $80,000 * 2

= $160,000

Book value at the end of 2nd year = Cost - Accumulated Depreciation

= $855,000 - $160,000

= $695,000

Ovens are sold for $650,000 and book value is $695,000.

Loss on sale of ovens = $695,000 - $650,000

= $45,000