Question

ABC Corporation purchased a machine on January 1, 2017, for $56,000. Before the machine was utilized in a productive capacity, it was needed to build a support in value of $4,000 to accommodate the machine, and to train an operator for using the machine ($2,000). For security reasons, a 5-years insurance policy was purchased for the machine in value of $5,000.

Depreciation on the machine was recorded at the end of each year. The depreciation rate is $6,200 per year. On February 1, 2020, the machine was sold for $40,000.

As a result of sale, ABC Corporation records a:

Loss 2.633

Loss 2.367

Gain 2.367

Gain 40.000

Answer 1

Hello,

I have solved this question by using the capitalization Concept, in which an asset is capitalized from purchase till installation. Insurance expenses are considered as Revenue expenses. Depreciation is calculated from the month of purchase till the month of Sale of asset.

Any doubt are welcome

				Answer
1)	Result of Sale to be Recorded by ABC Corporation
	Particulars			Amount $
	Cost of Machine			56,000
	Support for Machine		4000
	Operator Training			2000
	Total Cost oF Machine		62,000
	Depreciation	W.N. 3		-19,633
	Value as on February 1, 2020		42,367
	Sale of Machine			-40,000
	Loss on Sale			2,367
	Answer B	Loss on Sale $ 2,367
	Working Note :-
1)	Cost of Machine to be Capitalized from purchase of Machine till Installation. Therefore, Support for
	Machine and Operator Training Should be Capitalized.
2)	Insurance of machine is a Revenue Expenses. Therefore, not included in machine cost.
3)	Calculation of Deprecaition from Purchase (January,2017) till Sale of Machine i.e. February 1,2020.
		Depreciation Per Year               =	$6,200
		Total Years                                     =	3 years and 2 Months
		Depreciation                                =	6,200 x 3 years + 6,200 x 2 /12 Moths
				=	$    19,633