Canliss Mining uses the retirement method to determine depreciation on its office equipment.During 2014,its first year of operations,office equipment was purchased at a cost of $14,000.Useful life of the equipment averages four years and no salvage value is anticipated.In 2016,equipment costing $5,000 was sold for $600 and replaced with new equipment costing $6,000.Canliss would record 2016 depreciation of:
A)$3,500.
B)$4,400.
C)$5,400.
D)None of these answer choices are correct.

Question

Quizplus · Accepted Answer

The annual depreciation expense is determined by dividing the cost of the equipment by its useful life. In this case, the annual depreciation expense is $14,000 ÷ 4 = $3,500. Since the equipment was sold in 2016, depreciation should only be recorded for the portion of the year in which the equipment was still being used. Therefore, the 2016 depreciation expense is calculated as follows: $3,500 ÷ 12 months = $291.67 per month. The equipment was used for 8 months in 2016 (January to August), so the depreciation expense for 2016 is 8 × $291.67 = $2,333.33. The new equipment purchased for $6,000 will be depreciated over the next four years, so there is no depreciation recorded in 2016 for this equipment. Therefore, the total depreciation expense for 2016 is $2,333.33. However, since the equipment sold for $600, there is also a $4,400 loss on the sale ($5,000 - $600 - $3,500 accumulated depreciation). Therefore, the net effect on the income statement is a $2,066.67 ($2,333.33 - $4,400) loss for 2016.

Canliss Mining Uses the Retirement Method to Determine Depreciation on Its