Question

Orton Corporation, which has a calendar year accounting period, purchased a new machine for $40,000 on April 1, 2006. At that time Orton expected to use the machine for nine years and then sell it for $4,000. The machine was sold for $22,000 on Sept. 30, 2011. Assuming straight-line depreciation, no depreciation in the year of acquisition, and a full year of depreciation in the year of retirement, the gain to be recognized at the time of sale would be

Answer 1

To calculate the gain or loss to be recognized at the time of sale, subtract the accumulated depreciation from the selling price. In this case, there is a loss of $6,888.89 to be recognized.

Step-by-step explanation:

To calculate the gain to be recognized at the time of sale, we need to calculate the accumulated depreciation for the machine and compare it to the selling price. The machine was purchased for $40,000 and had an expected useful life of 9 years, so the annual depreciation expense would be $40,000 / 9 = $4,444.44.

Since the machine was sold on September 30, 2011, after 6.5 years (April 1, 2006, to September 30, 2011), the accumulated depreciation would be $4,444.44 * 6.5 = $28,888.89.

The gain to be recognized at the time of sale can be calculated by subtracting the accumulated depreciation from the selling price: $22,000 - $28,888.89 = -$6,888.89. Since the result is negative, it means that there is a loss of $6,888.89 to be recognized at the time of sale.

Answer 2

$2,000

Step-by-step explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset

Mathematically,

Depreciation = (Cost - Salvage value)/Estimated useful life

= $40,000-$4,000/9

= $4,000

When the amount received from the disposal of an asset is higher than the carrying value of the asset, the company makes a gain on disposal.

Carrying amount of assets at disposal

= $40,000 - 5($4,000)

= $20,000

Gain on disposal = $22,000 - $20,000

= $2,000