Financial Accounting: Assets Recorded

Question

An asset is purchased on January 1 for $42,200. It is expected to have a useful life of four years after which it will have an expected residual value of $5,500. The company uses the straight-line method. If it is sold for $31,000 exactly two years after it is purchased, the company will record a:

gain of $4,050.
gain of $7,150.
loss of $7,150.
loss of $4,050.

Answer 1

Gain of $7150

 

Cost of item $42,200 less residual value of $5,500 equals $36,700 of an asset that will be depreciated over 4 years.

 

Depreciation/year is $36,700/4 or $9,175/year.

 

Basis after two years would be $42,200 minus 2 times $9, 175 which equals $23,850.

 

Sales price:  $31,000 less basis of $23,850 equals a GAIN of $7,150.  

 

Note this is a Financial Accounting problem, not a tax accounting problem.