Question

On January 1, 2004, Bentham Company sells office furniture for $60,000 cash. The office furniture orginally cost $150,000 when purchased on January 1, 1997. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $15,000. What gain or loss on sale should be recorded on this asset in 2004?

	$34,500 loss.
	$75,000 loss.
	$4,500 gain.
	$19,500 gain.

Bruno Company purchased equipment on January 1, 2009 at a total invoice cost of $280,000; additional costs of $5,000 for freight and $25,000 for installation were incurred. The equipment has an estimated salvage value of $10,000 and an estimated useful life of five years. The amount of accumulated depreciation at December 31, 2010 if the straight-line method of depreciation is used is:

	$108,000.
	$110,000.
	$120,000.
	$124,000.

Equipment with an invoice cost of $20,000 was placed in service on January 3, 2009. Installation costs of $8,000 were added to Repairs Expense. These cost should have been added to the Equipment account. Depreciation for 2009 was computed using the straight-line method, and an estimated useful life of five years, with no salvage value expected. The net income reported for 2009 was:

	Understated $8,000.
	Understated $6,400.
	Overstated $1,600.
	Overstated $6,400.

Answer 1

Answer to Question 1.

Cost of Furniture = $150,000

Salvage Value = $15,000

Useful Life = 10 years

Depreciation per year = (Cost - Salvage Value)/ Useful Life

Depreciation per year = ($150,000 - $15,000)/ 10

Depreciation per year = $13,500

Accumulated Depreciation on the date of Sale = $13,500 * 7 = $94,500

Book value on the date of Sale = $150,000 - $94,500

Book Value on the date of Sale = $55,500

Sale Value = $60,000

As the Book value on the date of Sale is less than the Sale value, there is a gain of $4,500 ($60,000 - $55,500).

Answer to Question 2.

Value of Equipment = $280,000 + $5,000 + $25,000

Value of Equipment = $310,000

Straight Line Depreciation per year = (Cost - Salvage Value)/ Useful Life

Straight Line Depreciation per year = ($310,000 - $10,000)/5

Straight Line Depreciation per year = $60,000

Accumulated Depreciation at December 31, 2010 = $60,000* 2

Accumulated Depreciation at December 31, 2010 = $120,000

Answer to Question 3.

Value of understated Equipment = $8,000

Depreciation on Understated amount = $8,000/5 = $1,600

Overstated Expenses due to Repair Expense = $8,000

Understated Expense on undervaluation of Equipment = $1,600

Overall, the expenses are overstated by $6,400 ($8,000 - $1,600) which will understated income by $6,400.