Question

A county acquires equipment for 10,000,000 for use for a community project, reported in a special revenue fund. The equipment has a 5-year life with no residual value. After 3 years, the equipment is sold for 1,000,000. If straight-line depreciation is used, how is the sale reported in the special revenue fund?

1) As a gain of 1,000,000
2) As a loss of 1,000,000
3) As a gain of 9,000,000
4) As a loss of 9,000,000

Answer 1

If straight-line depreciation is used, the sale of the equipment would be reported as a loss of $4,000,000 in the special revenue fund.

Step-by-step explanation:

If straight-line depreciation is used, the annual depreciation expense for the equipment would be calculated as follows:

Depreciation Expense = (Cost of Equipment - Residual Value) / Useful Life

In this case, the cost of the equipment is $10,000,000 and there is no residual value. The useful life is 5 years.

Depreciation Expense = ($10,000,000 - $0) / 5 = $2,000,000 per year

After 3 years, the accumulated depreciation would be:

Accumulated Depreciation = Depreciation Expense x Number of Years

= $2,000,000 x 3 = $6,000,000

When the equipment is sold for $1,000,000, the difference between the original cost and the accumulated depreciation is considered a gain or loss. In this case, the difference is:

Difference = Cost of Equipment - Accumulated Depreciation

= $10,000,000 - $6,000,000 = $4,000,000

Since the equipment was sold for $1,000,000, which is less than the difference, it is reported as a loss of $4,000,000 in the special revenue fund.