The following beginning and ending balances were drawn from the records of Allen Company. If Allen Company sold equipment that had an original cost of $175,000 and accumulated depreciation of $75,000 for $62,500, how much did Allen pay for new equipment?
A)$12,500
B)$25,000
C)$100,000
D)$250,000

Question

The following beginning and ending balances were drawn from the records of Allen Company.  If Allen Company sold equipment that had an original cost of $175,000 and accumulated depreciation of $75,000 for $62,500, how much did Allen pay for new equipment?
A)$12,500 
B)$25,000 
C)$100,000 
D)$250,000

Quizplus · Accepted Answer

To determine the cost of new equipment, we need to use the equation Cost of New Equipment = Sale Price + Accumulated Depreciation - Original Cost.

Plug in the values given: 
Cost of New Equipment = $62,500 + $75,000 - $175,000 = $-37,500

This negative result means that the company actually lost money on the sale of the equipment. Therefore, the company must have purchased new equipment during the period, and the cost of that new equipment would not be reflected in the information we were given. The only logical answer choice is C, which is the only choice that represents a reasonable cost for new equipment based on the information given.

The Following Beginning and Ending Balances Were Drawn from the Records