Question

A company purchased equipment for $100,000 that is expected to have a useful life of 10 years and no salvage value. The company sold the equipment at the end of the fourth year of its useful life, at which point it had fair market value of $65,000. If the asset was sold for $55,000 and was being depreciated using the straight line method as was reported at book value, what amount of gain or loss would be reported at the time of the sale?  

		$10,000 gain
		$5,000 loss
		no gain or loss would be reported.

Answer 1

$5,000 loss

Working:

Straight line depreciation			=	(Cost - Salvage Value)/Useful life
			=	(100000-0)/10
			=	$           10,000
Accumulated depreciation at the end of fourth years			=	Straight line depreciation	x	4
			=	$           10,000	x	4
			=	$           40,000
Book value at the end of 4th year			=	Cost	-	Accumulated depreciation
			=	$       1,00,000	-	$ 40,000
			=	$           60,000
Calculation of gain or loss on sale of equipment:
Sales value				$           55,000
Less book value of equipment				$           60,000
Loss on sale of equipment				$             5,000