Question

On july 1, 2020, hale kennels sells equipment for $220,000. the equipment originally cost $600,000, had an estimated 5-year life and an expected salvage value of $100,000. the accumulated depreciation account had a balance of $350,000 on january 1, 2020, using the straight-line method. the gain or loss on disposal is

a) $30,000 gain.
b) $20,000 gain.
c) $30,000 loss.
d) $20,000 loss.

Answer 1

The gain on the disposal of equipment sold by Hale Kennels on July 1, 2020, for $220,000, with a book value of $200,000 at the time of sale, is a $20,000 gain.

Step-by-step explanation:

To calculate the gain or loss on the disposal of the equipment, we need to determine the book value of the equipment at the time of sale and then compare it to the sale price. The original cost of the equipment was $600,000 with a salvage value of $100,000 and a 5-year life.

Using the straight-line method, the annual depreciation is ($600,000 - $100,000) / 5 years = $100,000 yearly depreciation.

By January 1, 2020, with an accumulated depreciation of $350,000, the book value is $600,000 - $350,000 = $250,000.

From January to July (6 months), an additional half-year of depreciation occurs, which is $100,000 / 2 = $50,000, making the new accumulated depreciation $350,000 + $50,000 = $400,000 and the new book value $600,000 - $400,000 = $200,000. Upon selling the equipment for $220,000, the gain is $220,000 - $200,000 = $20,000 gain.