On January 1, 2011, a machine was purchased for $12,000. The machine was estimated to have a 10 year useful life and a residual value of $500. Straight-line depreciation is to be used. On January 1, 2013, the machine was then exchanged for computer equipment with a fair value of $10,000. Assuming that the exchange had commercial substance, how much would be recorded as a gain on disposal of the machine on January 1, 2013?

Question

Quizplus · Accepted Answer

The book value of the machine on January 1, 2013, would be:
Cost ($12,000) – Accumulated Depreciation ($2,000 for two years) = $10,000.
Since the fair value of the computer equipment received in exchange for the machine is $10,000, no gain or loss will be recognized. However, there will be a loss if the fair value of the equipment received was less than $10,000 and a gain if the fair value was more than $10,000. Since the fair value is exactly $10,000, the gain on disposal is $0. Therefore, the correct answer is B)$300.

On January 1, 2011, a Machine Was Purchased for $12,000