Question

Saddlebrook Co. Purchased equipment costing $420,000 on credit which will last four years, and have a $ 24,000 salvage value on January 1, 2003. Saddlebrook Co. Sold the equipment after two years on December 31, 2004 for $ 244,00. The equipment will be depreciated using the straight-line method. required

1. calculate the depreciation expense which will be recognized on the equipment every year.
2. calculate the gain, or loss from the sale of the equipment on December 31, 2004.

Answer 1

1. The depreciation expense for each year is $99,000. 2. There is a gain of $22,000 from the sale of the equipment on December 31, 2004.

Step-by-step explanation:

1. To calculate the depreciation expense, we need to use the formula: (Cost - Salvage Value) / Useful Life. In this case, the cost is $420,000 and the salvage value is $24,000. The useful life is 4 years. Plugging these values into the formula, we get: (420,000 - 24,000) / 4 = $99,000. Therefore, the depreciation expense for each year is $99,000.

2. To calculate the gain or loss from the sale of the equipment, we need to compare the selling price with the book value of the equipment. The book value can be calculated by subtracting the accumulated depreciation from the original cost. Since the equipment was sold after two years, the accumulated depreciation would be 2 * the annual depreciation expense, which is 2 * $99,000 = $198,000. The book value is therefore $420,000 - $198,000 = $222,000. The gain or loss is then the selling price minus the book value, which is $244,000 - $222,000 = $22,000. Therefore, there is a gain of $22,000 from the sale of the equipment on December 31, 2004.