An asset was acquired on January 1, 2021, for $15,000 with an estimated 4-year life and $1,000 residual value. The company uses straight-line depreciation. Calculate the gain or loss if the asset was sold on December 31, 2023, for $5,000.

a. $500 gain

b. $3,000 loss

c. $1,500 gain

d. $500 loss

b. $3,000 loss

Explanation:

For computing the gain or loss, first we have to determine the depreciation expense so that we can find the book value of an asset

So, under the straight-line method, the depreciation expense would be

= (Original cost - residual value) : (useful life)

= ($15,000 - $1,000) : (4 years)

= ($14,000) : (4 years)

= $3,500

For two years, the depreciation would be

= $3,500 * 2 years

= $7,000

In this method, the depreciation is same for all the remaining useful life

Now the book value would be

= Acquired value of an asset - accumulated depreciation

= $15,000 - $7,000

= $8,000

So, the gain would be

= Sale value - book value

= $5,000 - $8,000

= $3,000 loss