An asset's carrying amount is $36,000 on January 1, Year 6. The asset is being depreciated $500 per month using the straight-line method. Assuming the asset is sold on July 1, Year 7 for $25,000, the company should record:
A) Neither a gain or loss is recognized on this type of transaction.
B) A gain on sale of $2,000.
C) A loss on sale of $1,000.
D) A gain on sale of $1,000.
E) A loss on sale of $2,000.

Question

Quizplus · Accepted Answer

To determine if a gain or loss is recognized on the sale of an asset, we need to compare the book value (carrying amount) of the asset to the proceeds from the sale.

The book value of the asset on July 1, Year 7 (the date of sale) can be calculated as follows:

Book value on January 1, Year 7 = $36,000 - 18 months x $500/month = $27,000

Book value on July 1, Year 7 = $27,000 - 6 months x $500/month = $24,000

Since the asset was sold for $25,000, the company should record a loss on sale of $1,000 ($24,000 - $25,000 = -$1,000). Therefore, the correct answer is E.

An Asset's Carrying Amount Is $36,000 on January 1, Year