Question

On April 30, 2017, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value.

1. In the year 2023, Tilton Products sells this machinery for $4,500. At the date of sale, the machinery had been depreciated by Tilton Products to its estimated residual value of $8,000. This sale results in:

No gain or loss in either the financial statements or the income tax return.

A $3,500 loss in the financial statements, but no gain or loss in the income tax return.

A $3,500 loss in the financial statements; a $3,500 gain in the income tax return.

A $3,500 loss in both the company's financial statements and its income tax return.

2. Assume that in its financial statements, Tilton Products uses straight-line depreciation and the half-year convention. Depreciation expense recognized on this machinery in 2017 and 2018 will be:

$6,000 in 2017 and $12,000 in 2018.

$5,500 in 2017 and $11,000 in 2018.

$7,500 in 2017 and $11,000 in 2018.

$5,000 in 2017 and $10,000 in 2018.

Answer 1

1. Result of Sale of machinery:

From the above journal entry, it is evident that there is loss on sale of the machinery. This is a loss in the financial statement. When there is a loss in te sale of the machinery, then such loss will be recorded in the income tax returns as the long-term capital loss.

Hence, this sale results in a $3,500 loss in both the company's financial statements and it's income tax return.

2. Depreciation expense recognized in the machinery on 2017 and 2018.

Depreciation expense recognized in the machinery on 2017 using straight-line method.

Depreciation expense=Cost of the machinery-Residual value/Estimated useful life of machinery

=$88,000-$8,000/8years

=$80,000/8years

=$10,000 per year

Depreciation expense recognized in the machinery on 2017 using half-year convention.

Depreciation expense using half-year convention=Depreciation per year /2

=$10,000/2

=$5,000

Depreciation expense recognized in the machinery on 2018 using straight-line method.

Depreciation expense=Cost of the machinery-Residual value/Estimated useful life of machinery

=$88,000-$8,000/8years

=$80,000/8years

=$10,000 per year

Hence, the depreciation expense recognized on this machinery is $5,000 in 2017 and $10,000 in 2018.