Question

On January 1, 2013, Sitton Incorporated purchased a machine for $960,000. The machine had a 5-year useful life and $60,000 salvage value, and straight-line depreciation has been recorded. Sitton sold the machine on May 1, 2017 at a gain of $18,000. How much was Sitton paid for the machine?

A : $138,000.
B : $258,000.
C : $162,000.
D : $198,000

Answer 1

Correct answer is D, $198,000

Step-by-step explanation:

First, let's compute the accumated depreciation from January 1, 2013 to April 30, 2017 using straight-line method.

FORMULA :

Annual depeciation = (Cost of the machine - salvage value) / life of the machine

= ($960,000 - 60,000) / 5 years

= $180,000

Annual depreciation multiplied by 4 years and 4 months (January 1, 2013 to April 30, 2017).

$180,000 x 4 years =$720,000

$180,000 x 4/12 months = $60,000

Therefore, $720,000 plus $60,000 equals $780,000 (ACCUMULATED DEPRECIATION)

FINALLY, Compute the procceds of the sale by adding carrying amount and the gain on sale.

$960,000 - $780,000 = $180,000 (carrying amount as of MAY 1, 2017)

$180,000 + $18,000 = $198,000 (answer)