An asset is purchased on January 1 for $40,000.It is expected to have a useful life of five years after which it will have an expected residual value of $5,000.The company uses the straight-line method.If it is sold for $30,000 exactly two years after it is purchased,the company will record a:
A)gain of $6,000.
B)gain of $4,000.
C)loss of $4,000.
D)loss of $6,000.

Question

Quizplus · Accepted Answer

Annual depreciation expense = (Cost − Residual value)× (1 ÷ Useful life)
= ($40,000 − $5,000)× (1 ÷ 5)= $7,000
Accumulated depreciation = Year 1 depreciation expense + Year 2 depreciation expense
= $7,000 + $7,000 = $14,000
Gain (loss)on disposal = Proceeds from sale − Book value at time of sale
Gain (loss)on disposal = Proceeds from sale − (Cost − Accumulated Depreciation at time of sale)
= $30,000 − ($40,000 − $14,000)= $4,000

An Asset Is Purchased on January 1 for $40,000