Question

An asset was purchased for $12,000. The asset's estimated useful life was 5 years and its residual value was $2,000. Straight-line depreciation was used. How much gain or loss is reported if the asset is sold for $400 at the end of the fifth year

Answer 1

$1,600 loss

Step-by-step explanation:

Profit = Proceeds - Carrying Amount

where,

Carrying Amount = Cost - Accumulated depreciation

Accumulated depreciation calculation :

Note the Company uses straight line method.

Depreciation expense = (Cost - Residual) ÷ Estimated Useful Life

therefore,

Depreciation expense = ($12,000 - $2,000) ÷ 5

= $2,000

Accumulated depreciation :

At the end of fifth year we would have used the asset for 5 years.

Accumulated depreciation is the total of depreciation after 5 years.

This would be $10,000 ($2,000 x 5)

thus,

Carrying Amount = $12,000 - $10,000 = $2,000

therefore

Profit = $400 - $2,000

= - $1,600