On January 1, 2020, 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, 2022, 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, 2022?

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The cost of the machine is $12,000, with a residual value of $500, leading to a depreciable amount of $11,500 over a 10-year life. This results in annual depreciation of $1,150. After 2 years, accumulated depreciation is $2,300 ($1,150 x 2), leaving a book value of $9,700 ($12,000 - $2,300). The machine is exchanged for equipment valued at $10,000, resulting in a gain of $300 ($10,000 - $9,700).

On January 1, 2020, a Machine Was Purchased for $12,000