Question

An asset is purchased on January 1 for $40,000. It is expected to have a useful life of five years after which it will have an expected salvage value of $5,000. The company uses the straight-line method.

If it is sold for $30,000 exactly two years after its purchase, the company will record a:

A. gain of $6,000.
B. gain of $4,000.
C. loss of $4,000.
D. loss of $6,000.

Answer 1

Tje correct answer is option B. Using straight-line depreciation, the gain on the sale of the asset after two years is calculated to be $4,000.

Step-by-step explanation:

The question pertains to the calculation of gain or loss on the sale of an asset using the straight-line depreciation method. Firstly, the total depreciation expense over the useful life of the asset is determined, then the annual depreciation expense is calculated. Given the asset's original cost was $40,000 and its expected salvage value is $5,000 over a useful life of five years, the total depreciation is $35,000 ($40,000 - $5,000). The annual depreciation expense is therefore $7,000 ($35,000 / 5 years). After two years, the accumulated depreciation is $14,000 ($7,000 x 2 years). This means the book value of the asset on the date of sale is $26,000 ($40,000 - $14,000). Since the asset is sold for $30,000 which is greater than the book value, the company records a gain of $4,000 ($30,000 sale price - $26,000 book value).