Stevenson Company purchased equipment for $250,000 on January 1, 2010. The estimated salvage value is $50,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. On July 1, 2013 Stevenson sold the equipment for $100,000. Calculate the gain or loss on the sale of the equipment

The answer is loss of $10,000 on the sale of the equipment

Explanation:

The formula for straight-line depreciation is:

(Cost of asset - salvage value) : number of useful life.

Cost of asset is $250,000

Salvage value is $50,000

Useful life is 5 years

So depreciation for the year is:

($250,000 - $50,000) : 5 years

$200,000 : 5 years

=$40,000

January 1 2010 through June 30 2013 is 3 years and 6months

Accumulated depreciation will be:

3.5 years (3 years + 6months/12 months) x $40,000

$140,000

Carrying value or net book value at this date is $250,000 - $140,000

=$110,000.

The equipment was sold for $100,000.

Selling price - carrying value

=$100,000 - $110,000

= - $10,000

We have a loss of $10,000 on the sale of equipment