Orton Corporation, which has a calendar year accounting period, purchased a new machine for $40,000 on April 1, 2006.At that time Orton 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, 2011.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

We can calculate the book value of the machine at the end of 2011 using straight-line depreciation:

Annual depreciation = ($40,000 - $4,000) / 9 years = $4,000 per year
Depreciation for 2011 (9 months) = $4,000 / 12 months * 9 months = $3,000
Book value at end of 2011 = $40,000 - $3,000 = $37,000

Since the machine was sold for $22,000, the gain to be recognized would be:

Sale price - Book value = $22,000 - $37,000 = ($15,000)

Since the gain is negative, it means there is actually a loss on the sale, not a gain. Therefore, the correct answer is D) $0. No gain is recognized and a loss of $15,000 is recognized.

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