Question

Jack started a new accounting practice. He purchased $35,000 of computer equipment and placed the equipment in service in May. (Here is MARCS HY depreciation rates for 5 year property. (Year 1 -20.0%, Year 2 -32.0%, Year 3 -19.2% Year 4 -11.52%, Year 5 -11.52% and Year 6% - 5.76%. Unfortunately, the business was not doing well. In year 3, Jack decided to close the business. He sold the property for $10,500. What is Jack's gain or loss on the sale of the computer equipment?

Answer 1

Depreciation Rate is given as per 200% declining balance method

First-Year Depreciation will be: Cost X Depreciation Conversion = $35000*20% = $7000

Note: Since the property does not fall into mid-month or mid-quarter convention, the half-year convention is relevant and only Half Year Depreciation is Charged

Subsequent /Second Year Depreciation will be : (Cost − Depreciation in Previous Years) X Depreciation Conversion

=( 35000-7000 ) X 32% = $8960

in the Third Year, Computer is sold for $ 10,500

here assumed that property is sold at the end of the year i.e 31st December, so Depreciation will be charged for a complete year and Depreciation for third Year will be :  

=(Cost − Depreciation in Previous Years) X Depreciation Conversion

=( 35000-7000-8960 ) X 19.2% = 19040 X 19.2% = 3655.68

Written Down Value of the Assets will be at the end of Third Year will be :

=Original Cost- Sum of Depreciation Charged till the using Period

=35000-7000-8960-3655.68= 15384.32

LOSS ON SALE OF COMPUTER EQUIPMENT :

= Amount of Sale of Computer Equipment - Written Down value of the Computer Equipment

=$10500 -$15384.32 = -$4884.32 ( Negative result, means Loss on sale )

Hence, Jack will have a Loss of $ 4884.32 on sale of Computer Equipment