Sears Corporation, which has a calendar year accounting period, purchased a new machine for $40,000 on April 1, 2002.At that time Sears expected to use the machine for nine years and then sell it for $4,000.The machine was sold for $22,000 on Sept.30, 2007.Assuming straight-line depreciation, no depreciation in the year of acquisition, and a full year of depreciation in the year of retirement, the gain to be recognized at the time of sale would be

Question

Quizplus · Accepted Answer

The machine was expected to have a useful life of 9 years, and was purchased on April 1, 2002, so it would have been in use for 5 years and 6 months when it was sold on September 30, 2007.

The cost of the machine was $40,000, and the salvage value was $4,000, so the depreciable cost of the machine is $36,000 ($40,000 - $4,000).

The annual depreciation expense is $4,000 ($36,000 ÷ 9 years), and the depreciation for the 5 years and 6 months that the machine was in use before it was sold is $23,000 ($4,000 × 5.5 years).

The book value of the machine at the time of sale is $13,000 ($36,000 - $23,000).

The machine was sold for $22,000, so the gain to be recognized is $9,000 ($22,000 - $13,000).

Since the machine was fully depreciated, there is no tax liability on the sale, so the entire $9,000 gain is recognized for accounting purposes. Therefore, the correct answer is C) $2,000, which is the difference between the expected salvage value of $4,000 and the actual salvage value of $22,000.

Sears Corporation, Which Has a Calendar Year Accounting Period, Purchased