ExpertHard1 markMultiple Choice
CPA · Question 36 · Area II: Balance Sheet Accounts
Emerald Corp. purchased equipment for $240,000 on January 1, Year 1. The equipment has a 5-year useful life with no salvage value. On January 1, Year 3, Emerald sells the equipment for $130,000.<br/><br/>What gain or loss should Emerald recognize on the sale?
Emerald Corp. purchased equipment for $240,000 on January 1, Year 1. The equipment has a 5-year useful life with no salvage value. On January 1, Year 3, Emerald sells the equipment for $130,000.<br/><br/>What gain or loss should Emerald recognize on the sale?
Answer options:
A.
$14,000 gain
B.
$34,000 loss
C.
$14,000 loss
D.
$110,000 loss
How to approach this question
Calculate book value at sale date (original cost minus accumulated depreciation), then compare to sale proceeds. If proceeds < book value, it's a loss; if proceeds > book value, it's a gain.
Full Answer
C.$14,000 loss✓ Correct
Gain/loss on disposal = Sale proceeds - Book value. Annual depreciation = $240,000 ÷ 5 = $48,000. After 2 years, accumulated depreciation = $96,000. Book value = $240,000 - $96,000 = $144,000. Loss = $130,000 - $144,000 = $(14,000).
Common mistakes
Using original cost instead of book value, not calculating accumulated depreciation correctly, or getting the gain/loss direction wrong
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