The following beginning and ending balances were drawn from the records of Allen Co.
If Allen Co.sold equipment that had an original cost of $175,000 and accumulated depreciation of $75,000 for $62,500,how much did Allen pay for new equipment?

A)$12,500.
B)$25,000.
C)$100,000.
D)$250,000.

Question

The following beginning and ending balances were drawn from the records of Allen Co.
If Allen Co.sold equipment that had an original cost of $175,000 and accumulated depreciation of $75,000 for $62,500,how much did Allen pay for new equipment?

A)$12,500. 
B)$25,000. 
C)$100,000. 
D)$250,000.

Quizplus · Accepted Answer

To find the answer, we need to use the formula:
original cost - accumulated depreciation = book value
The book value of the equipment sold would be:
$175,000 - $75,000 = $100,000
Since the equipment was sold for $62,500, Allen Co. would have a loss of:
$100,000 - $62,500 = $37,500
This loss would be recorded as an expense on the income statement. To balance this expense, Allen Co. would need to purchase new equipment of at least $37,500. However, the question asks for how much Allen paid for new equipment, which means we need to find the amount that would cover the loss and also result in a net increase in equipment. Therefore, the correct answer is option C, $100,000.

The Following Beginning and Ending Balances Were Drawn from the Records