Rhoundakona Corporation bought property, plant, and equipment on January 1, 2017, at a cost of $35,000. Estimated residual value is $5,000 and the estimated useful life is 8 years. The company
Uses straight-line depreciation. On January 1, 2020, Rhoundakona's management sells the asset for
$25,000. The balance in Accumulated Depreciation on January 1, 2020, is:

Question

Quizplus · Accepted Answer

To calculate the balance in Accumulated Depreciation as of January 1, 2020, we need to calculate the total depreciation that has been recognized on the asset up to that date.

The annual depreciation expense using straight-line method is calculated as follows:

Cost - Residual Value
------------------------------------
Useful Life

($35,000 - $5,000) ÷ 8 = $3,750

So the annual depreciation expense is $3,750.

To calculate the cumulative amount of depreciation up to January 1, 2020, we need to multiply this amount by the number of years the asset has been held:

$3,750 × 3 years = $11,250

Therefore, the balance in Accumulated Depreciation on January 1, 2020, is $11,250.

When the asset is sold for $25,000, we need to consider the gain or loss on disposal.

The book value of the asset as of January 1, 2020, would be:

Cost - Accumulated Depreciation = $35,000 - $11,250 = $23,750

The gain or loss on disposal is calculated as follows:

Selling Price - Book Value = $25,000 - $23,750 = $1,250

Since the asset was sold for a higher price than its book value, there is a gain of $1,250.

Rhoundakona Corporation Bought Property, Plant, and Equipment on January 1