Question

In: Accounting

Trainor Corporation purchased equipment at a cost of $500,000. The equipment has an estimated residual value...

Trainor Corporation purchased equipment at a cost of $500,000. The equipment has an estimated residual value of $50,000 and an estimated life of 5 years, or 10,000 hours of operation. The equipment was purchased on January 1, 2020 and was used 2,500 hours in 2020 and 2,100 hours in 2021. On January 1, 2022, the company decided to sell the equipment for $315,000. Trainor Corporation uses the units-of- production method to account for the depreciation on the equipment.

Based on this information, the entry to record the sale of the equipment will show a gain of:

Select one:

A. $45,000

B. $72,000

C. $5,000

D. $22,000

Expert Solution

Option (D) is correct

Under units of production method, first we will calculate the rate per hour and then we will calculate the depreciation expense.

Rate per hour = Cost - Residual value / Estimated hours

Estimated hours = 10000

Rate per hour = ($500000 - $50000) / 10000 = $450000/ 10000 = $45 per hour

In the next step, we will compute the depreciation expense as per below:

Depreciation expense = Rate per hour * hours run

Depreciation for 2020 :

No. of hours run in 2020 was 2500, so

Depreciation for 2020 = $45 * 2500 = $112500

Depreciation for 2021:

No. of hours run in 2021 was 2100, so

Depreciation for 2021 = $45 * 2100 = $94500

Total depreciation charged till date or Accumulated depreciation = $112500 + $94500 = $207000

Cost of equipment = $500000

Next, we will calculate the book value of the equipment on the date of sale as per below:

Book value = Cost - Accumulated depreciation

Book value = $500000 - $207000 = $293000

Now, Gain (or loss) on sale is:

Gain (or loss) = Sale price - Book value

Gain (or loss) = $315000 - $293000 = $22000

ekkarill92 answered 1 year ago

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