Use the information below to answer the following questions:
Tanner Ltd purchased an item of equipment on the first day of the financial period, 1 July 2010, for $200 000. The equipment was depreciated using the reducing balance method and a rate of 40%. It was sold on 1 July 2012.
-If the machine was sold for $65 000,what was the gain or loss on disposal?
A) gain of $14 000
B) gain of $10 000
C) loss of $7000
D) gain $7000.

Question

Use the information below to answer the following questions:
Tanner Ltd purchased an item of equipment on the first day of the financial period, 1 July 2010, for $200 000. The equipment was depreciated using the reducing balance method and a rate of 40%. It was sold on 1 July 2012. 
-If the machine was sold for $65 000,what was the gain or loss on disposal?
A) gain of $14 000
B) gain of $10 000
C) loss of $7000
D) gain $7000.

Quizplus · Accepted Answer

To calculate the gain or loss on disposal, we need to compare the proceeds from the sale ($65,000) to the carrying value of the equipment on the date of sale.

Carrying value = cost of the equipment - accumulated depreciation

For 3 years of depreciation: 
Depreciation for year 1 = $200,000 x 40% = $80,000 
Depreciation for year 2 = ($200,000 - $80,000) x 40% = $48,000 
Depreciation for year 3 = ($200,000 - $80,000 - $48,000) x 40% = $28,800

Accumulated depreciation after 3 years = $80,000 + $48,000 + $28,800 = $156,800

Carrying value on 1 July 2012: 
Cost of equipment - accumulated depreciation = $200,000 - $156,800 = $43,200

Since the machine was sold for $65,000 and the carrying value was $43,200, the gain on disposal is $65,000 - $43,200 = $21,800. However, since the question asks specifically for gain or loss, we need to take into account whether the gain exceeds or falls short of the carrying value. In this case, the carrying value is lower than the proceeds from the sale, indicating a gain of $21,800. Therefore, the correct answer is C, loss of $7,000.

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