Equipment was acquired on January 1, 2021, for $25,000 with an estimated four-year life and $1,000 residual value. The company uses straight-line depreciation. Record the gain or loss if the equipment was sold on December 31, 2023, for $7,600.

a. Cash $7,600 Accumulated Depreciation $18,000 Equipment $25,000 Gain $600

b. Cash $7,600 Equipment $7,000 Gain $600

c. Cash $7,600 Equipment $6,000 Gain $1,600

d. Cash $7,600 Accumulated Depreciation $12,000 Loss $5,400 Equipment $25,000

d. Cash $7,600 Accumulated Depreciation $12,000 Loss $5,400 Equipment $25,000

Explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset

Mathematically,

Depreciation = (Cost - Salvage value) / Estimated useful life

Annual depreciation

= (25,000 - 1,000) / 4

= $6,000

After 3 years (2021 - 2023), the netbook value or carrying amount of the asset

= $25,000 - 3 ($4000)

= $13,000

the accumulated depreciation

= $12,000

When the amount received from the disposal of an asset is higher than the carrying value of the asset, the company makes a gain on disposal.

Loss on disposal

= $7,600 - $13,000

= ($5,400)