Question

On January 1, 2018, Lumos Company purchased a machine for $70,200. Lumos uses straight-line depreciation and estimates an eight-year useful life and an $5,400 salvage value. On December 31, 2021, Lumos sells the machine for $42,000. In recording this sale, Lumos should reflect:

Answer 1

Gain= $4,200

Step-by-step explanation:

Giving the following information:

Purchase price (2018)= $70,200

Salvage value= $5,400

Useful life= 8 years

Selling price= $42,000

First, we need to calculate the depreciation expense and accumulated depreciation:

Annual depreciation= (original cost - salvage value)/estimated life (years)

Annual depreciation= (70,200 - 5,400) / 8

Annual depreciation= $8,100

Accumulated depreciation (ending 2021)= 8,100*4= $32,400

If the selling price is higher than the book value, the company gain from the sale. Now, we need to determine the book value.

Book value= purchase price - accumulated depreciation

Book value= 70,200 - 32,400= $37,800

Gain/loss= selling price - book value

Gain/loss= 42,000 - 37,800

Gain= $4,200