Question

On June 24, 20Y9, a building was sold for $225,000 cash. The building was originally purchased in 20Y1 for $210,000. To date, it had accumulated depreciation of $20,000. Which of the following is true on the date of disposition?

		A.A gain on sale of $35,000 should be recorded.
		B.The building had a net book value of $205,000.
		C.The building had a fair market value of $190,000.
		D.The building had a net book value of $225,000

Answer 1

Solution :

As per the information given in the question we have

Original purchase price of the building in 20Y1 = $ 210,000 ;

Accumulated depreciation on the date of sale i.e., June 24, 20Y9 = $ 20,000 ;

Thus the Book value of the building as on the date of sale = Original purchase price of the building in 20Y1 - Accumulated depreciation on the date of sale

= $ 210,000 - $ 20,000 = $ 190,000

Further as per the information given in the question we have

Sale price of the building = $ 225,000 ; Book value of the building as on the date of sale = $ 190,000 ;

Thus the gain on sale of the building = Sale price of the building - Book value of the building as on the date of sale

= $ 225,000 - $ 190,000

= $ 35,000

Thus the gain on sale of the building = $ 35,000

The solution is option A. A gain on sale of $35,000 should be recorded.

The other options are incorrect due to the reasons given as follows :

B.The building had a net book value of $205,000.

As calculated above, the building has a net book value of $ 190,000. Thus the statement given is false.

C.The building had a fair market value of $190,000.

The fair market value of the building is not given in the question. $ 190,000 is the net book value of the building. Thus the statement given is false.

D.The building had a net book value of $225,000

As calculated above, the building has a net book value of $ 190,000. Thus the statement given is false.