Mendez Company purchases equipment for $7,700 for which it estimates a seven-year useful life and a $700 salvage value. If Mendez uses straight-line depreciation and sells the equipment for $3,500 after four years of use, Mendez will show a $300 gain on the sale.

Question

Quizplus · Accepted Answer

The annual depreciation is calculated as (Cost - Salvage Value) / Useful Life = ($7,700 - $700) / 7 = $1,000 per year. After 4 years, the accumulated depreciation is $4,000 ($1,000 * 4), making the book value $3,700 ($7,700 - $4,000). Selling the equipment for $3,500 results in a $200 loss ($3,500 - $3,700), not a $300 gain.

Mendez Company Purchases Equipment for $7,700 for Which It Estimates