An asset's book value is $36,000 on January 1,Year 6.The asset is being depreciated $500 per month using the straight-line method.Assuming the asset is sold on July 1,Year 7 for $25,000,the company should record:
A)Neither a gain or loss is recognized on this type of transaction.
B)A gain on sale of $2,000.
C)A loss on sale of $1,000.
D)A gain on sale of $1,000.
E)A loss on sale of $2,000.

Question

Quizplus · Accepted Answer

First, we need to calculate the total depreciation expense from January 1, Year 6 to July 1, Year 7. There are 18 months in total (from January 1, Year 6 to June 1, Year 7, it's 17 months plus half a month in July), so the total depreciation expense is:
$500/month x 18 months = $9,000
On July 1, Year 7, the accumulated depreciation will be:
$500/month x 18 months = $9,000
So the asset's carrying value (book value) on July 1, Year 7 will be:
$36,000 - $9,000 = $27,000
Since the asset is sold for $25,000, the company will record a loss on sale of:
$25,000 - $27,000 = -$2,000 or a loss of $2,000.

An Asset's Book Value Is $36,000 on January 1,Year 6