Strawberry Fields purchased a tractor at a cost of $37,000 and sold it two years later for $24,500. Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $8,000 residual value 1. What was the gain or loss on the sale?

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Business

Jason

7 January, 21:31

Strawberry Fields purchased a tractor at a cost of $37,000 and sold it two years later for $24,500. Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $8,000 residual value 1. What was the gain or loss on the sale?

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Steve Cherry · Answer 1

Loss on sale: $900

Explanation:

Straight-line depreciation is whereby the same amount is depreciated every year, in order to account for the asset's wear and tear over the years.

It is calculated as:

(Cost of asset - residual value) / number of useful years.

In this case, depreciation for one year: ($37000 - $8000) / 5 = $5800 per year. In order to calculate whether there was a gain or loss of the sale of asset, the sale value must be compared to the net book value of the asset. The net book value shows how much an asset is currently worth after accounting for depreciation over the years.

If the sale price is higher than the NBV, it is a gain on the sale. If the sale price is lower than the NBV, it is a loss on the sale. The net book value is calculated as:

Cost of asset - Accumulated depreciation

If the asset has depreciated for two years before the sale, it's accumulated depreciation is $5800 x 2 = $11600. Hence, net book value would be $37000 - $11600 = $25,400.

It's worth is $25,400 but was sold for $24,500. Thus, there is a loss on the sale of $25,400 - $24,500 = $900