Question

On january 1, 2011, mccarthy converting purchased equipment for $608,000. at that time, the machine had an estimated 10-year useful life and $32,000 residual value. mccarthy has recorded monthly straight-line depreciation on the equipment. mccarthy sold the equipment on december 31, 2019 for $80,000. how much gain/loss should mccarthy recognize on the sale?select answer from the options below

a. gain of $22,400
b. loss of $9,600
c. loss of $35,200
d. gain of $19,200

Answer 1

McCarthy's equipment had a book value of $89,600 on December 31, 2019, after accounting for the accumulated depreciation. The equipment was sold for $80,000, resulting in a recognized loss of $9,600.

Step-by-step explanation:

To calculate the gain or loss McCarthy should recognize on the sale of the equipment, we will use the straight-line depreciation method. The cost of the equipment was $608,000, with a residual value of $32,000, and a useful life of 10 years. The annual depreciation is calculated as (Cost - Residual Value) / Useful life. Therefore, the annual depreciation is ($608,000 - $32,000) / 10 = $57,600 per year. Over 9 years, the total depreciation would be 9 * $57,600 = $518,400. The book value of the equipment on December 31, 2019, would be the cost minus accumulated depreciation, which is $608,000 - $518,400 = $89,600. McCarthy sold the equipment for $80,000, so the loss is the book value minus the sale price, which is $89,600 - $80,000 = $9,600. Therefore, McCarthy should recognize a loss of $9,600.