Carter Company disposed of an asset at the end of the eighth year of its estimated life for $10,000 cash.The asset's life was originally estimated to be 10 years.The original cost was $50,000 with an estimated residual value of $5,000.The asset was being depreciated using the straight-line method.What was the gain or loss on the disposal?
A)$1,000 loss.
B)$4,000 loss.
C)$5,500 gain.
D)$10,000 gain.

Question

Quizplus · Accepted Answer

To calculate the gain or loss on the disposal, we need to compare the asset's book value (i.e., carrying value) to the amount of cash received from the sale.

Book value at the time of disposal can be calculated as:

Cost - Accumulated Depreciation

The asset's cost was $50,000, and it had an estimated residual value of $5,000. Therefore, its depreciable base (cost - residual value) was $45,000, and the annual depreciation expense was $4,500 ($45,000 depreciable base / 10 estimated years of useful life).

After eight years of straight-line depreciation, the accumulated depreciation would be:

$4,500 depreciation expense per year x 8 years = $36,000

The asset's book value at the time of disposal would be:

$50,000 cost - $36,000 accumulated depreciation = $14,000

Since the company received $10,000 cash from the sale, we can calculate the gain or loss on the disposal as:

Cash received - Book value = Gain/Loss

$10,000 - $14,000 = -$4,000 (loss)

Therefore, the answer is B, $4,000 loss.

Carter Company Disposed of an Asset at the End of the Eighth