Question

A company is selling used office equipment for $12,000. They purchased it 2 years ago for $50,000. It was expected to have a useful life of 5 years. They use straight line depreciation. What is the gain or loss on the sale

Answer 1

Answer:

$18,000 loss on sale

Explanation:

It is important to notice that the company uses the straight line depreciation method on the equipment.

Annual Depreciation charge = (Cost - Salvage Value) ÷ Number years of useful life

Therefore

Annual Depreciation charge = ( $50,000 - $ 0) ÷ 5

                                                = $10,000

Depreciation for the period in use will be :

Year 1 = $10,000

Year 2 = $10,000

Accumulated depreciation = $20,000

Now given the cost and proceeds as follows :

Cost = $50,000

Proceeds = $12,000

Profit  on Sale = Proceeds - ( Cost - Accumulated Depreciation)

                        = $12,000 - ( $50,000 - $20,000)

                        = ($18,000)

The Company will realize a loss on sale of $18,000