Question

Carter Company disposed of an asset at the end of the eighth year of its estimated life for $14,500 cash. The asset's life was originally estimated to be 10 years. The original cost was $59,900 with an estimated residual value of $5,900. The asset was being depreciated using the straight-line method. What was the gain or loss on the disposal?

O $9,100 gain.
O $3,700 loss.
O $2,200 loss.
O $14,500 gain.

Answer 1

Carter Company had an asset with a book value of $16,700 at the end of the eighth year. The asset was sold for $14,500, resulting in a loss of $2,200. The correct option is a $2,200 loss.

Step-by-step explanation:

To calculate the gain or loss on the disposal of an asset, Carter Company needs to determine the book value of the asset at the time of its sale. The original cost of the asset was $59,900, and the estimated residual value was $5,900. Depreciation expense is calculated using the straight-line method, which equalizes the expense over the estimated useful life of the asset. The formula for annual depreciation using the straight-line method is:

(Original Cost - Residual Value) / Useful Life = Annual Depreciation Expense

($59,900 - $5,900) / 10 years = $5,400 per year

Since the asset was disposed of at the end of the eighth year, total depreciation would be:

Annual Depreciation Expense x Number of Years = Accumulated Depreciation
$5,400 x 8 years = $43,200

The book value of the asset at the time of sale is:

Original Cost - Accumulated Depreciation = Book Value
$59,900 - $43,200 = $16,700

Now, by comparing the book value to the sale price, we can find out whether there was a gain or loss:

Sale Price - Book Value = Gain/Loss on Disposal
$14,500 - $16,700 = -$2,200

Therefore, Carter Company experienced a loss of $2,200 on the disposal of the asset. The correct option is $2,200 loss.