Question

On January 1, 2012, Waterway Industries purchased for $720000, equipment having a useful life of ten years and an estimated salvage value of $48000. Waterway has recorded monthly depreciation of the equipment on the straight-line method. On December 31, 2020, the equipment was sold for $147500. As a result of this sale, Waterway should recognize a gain of

a. $147500
b. $80300
c. $32300
d. $0.

Answer 1

As a result of this sale, Waterway should recognize a gain of $32,300 (Option C).

Step-by-step explanation:

Under straight-line method, depreciation is an allocation of the cost of an asset over its estimated useful life and it is expressed with this formula: (cost - residual value) / No of years = ($720,000 - $48,000) / 10 years = $67,200 yearly depreciation expense.

Accumulated depreciation from January 1, 2012 to December 31, 2020 (9 Years) is $67,200 x 9 years $604,800.

So, the net book value (NBV) of the asset (expressed as Cost - Accumulated depreciation) is $720,000 - $604,800 = $115,200.

Gain or (loss) on disposal = Sales proceed - NBV = $147,500 - $115,200 = $32,300.