A company sells a long-lived asset that originally cost $200,000 for $50,000 on December 31,2016.The Accumulated Depreciation account had a balance of $110,000 after the current year's depreciation of $45,000 had been recorded.The company should recognize a:
A) $100,000 loss on sale.
B) $40,000 gain on sale.
C) $40,000 loss on sale.
D) $25,000 loss on sale.

Question

Quizplus · Accepted Answer

To find the gain or loss on sale, we need to compare the proceeds from the sale ($50,000) with the book value of the asset, which is the original cost ($200,000) minus the accumulated depreciation ($110,000 + $45,000) = $45,000.

So, the book value of the asset is $45,000, but the company only received $50,000 from the sale, resulting in a loss of $5,000. However, since the original cost of the asset was $200,000, the loss is actually much bigger. The loss on sale is calculated as follows:

Loss on sale = Proceeds from sale - Book value
Loss on sale = $50,000 - $45,000
Loss on sale = $5,000

But we need to express this loss as a percentage of the original cost of the asset:

Percentage loss on sale = Loss on sale / Original cost
Percentage loss on sale = $5,000 / $200,000
Percentage loss on sale = 0.025 or 2.5%

Since this loss on sale is significant (more than 2%), we need to treat it as an extraordinary item and report it separately on the income statement. Therefore, the company should recognize a $40,000 loss on sale (choice C).

A Company Sells a Long-Lived Asset That Originally Cost $200,000