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3 August, 00:44

Ott Co. purchased a machine at an original cost of $90,000 on January 2, Year 1. The estimated useful life of the machine is 10 years, and the machine has no salvage value. Ott uses the straight-line method to calculate depreciation. On July 1, Year 10, Ott sold the machine for $5,000. What is the amount of gain or loss on the disposal of the machine?

a) $500 loss

b) $500 gain

c) $4,500 loss

d) $4,500 gain

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Answers (1)
  1. 3 August, 03:07
    0
    The answer is B.

    Explanation:

    Straight line method of depreciation is:

    Cost of the asset minus salvage value/number of years

    Cost of the machine is $90,000

    Salvage value is $0

    Number of useful life is 10 years

    So we have,

    90,000/10

    Depreciation = $9,000

    So $9,000 will bee charged yearly ($90,000 will be reducing by $9,000 yearly).

    The number of years from January 2 year 1 through July 1 year 10 is 9 years and 6months

    6 months is half a year.

    Depreciation to be recognized is;

    9 x $9000 + 9000/2 (half a year)

    $81,000 + $4,500

    $85,500

    Therefore, the carrying value of the asset at July 1, year 10 is

    $90,000 - $85,500

    $4,500

    The machine was sold for $5,000.

    The sales price is greater than carrying amount at the time of sale. This means that there is a gain

    So the gain is $5,000 - $4,500

    Gain of $500
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