Question

On January 1, 2016, Horton Inc. sells a machine for $25,800. The machine was originally purchased on January 1, 2014 for $46,700. The machine was estimated to have a useful life of 5 years and a residual value of $0. Horton uses straight-line depreciation. In recording this transaction: a. a loss of $2,220 would be recorded. b. a loss of $20,900 would be recorded. c. a gain of $25,800 would be recorded. d. a gain of $2,20 would be recorded.

Answer 1

a) a loss of $2220 would be recorded.

Step-by-step explanation:

Calculation for the Loss on sale

First step is to calculate the Depreciation per annum using this formula

Depreciation per annum = (Purchase Cost-salvage value) / Useful life

Depreciation per annum = 46700/5

Depreciation per annum= $9,340

Second Step will be to calculate the 31/12/15 Book Value

1/1/14 Purchase cost $46,700

Less: 31/12/14 Depreciation for the year ended 31 ($9,340)

31/12/14 Book Value $37,360

($46,700-$9,340)

Less: 31/12/15 Depreciation for the year ended ($9,340)

31/12/15 Book Value $28,020

($37,360-$9,340)

Last step is to calculate the Loss on sale

1/1/16 Value $28,020

1/1/16 Less Sale value ($25,800)

Loss on sale $2220

(28,020-25,800)

Therefore the correct option is :a loss of $2220 would be recorded.