Bennie Razor Company has decided to sell one of its old manufacturing machines on June 30, 2015. The machine was purchased for $80,000 on January 1, 2011, and was depreciated on a straight-line basis for 10 years assuming no salvage value. If the machine was sold for $26,000, what was the amount of the gain or loss recorded at the time of the sale?

(a) $18,000

(b) $54,000

(c) $22,000.

Answer:

Date of purchase = January 1, 2011

Date of sale = June 30, 2015

Maturity has been used for 4.5 years

Cost of machine = $80,000

Estimated useful life = 10 years

Annual deprecation = Cost of machine/ Estimated useful life

= 80,000/10

= $8,000

Accumulated depreciation expense for 4.5 years = Annual deprecation x 4.5

= 8,000 x 4.5

= $36,000

Book value of machine at June 30, 2015 = Cost of machine - Accumulated depreciation expense for 4.5 years

= 80,000-36,000

= $44,000

Sale price of machine = $26,000

Loss on sale of machine = Book value of machine at June 30, 2015 - Sale price of machine

= 44,000-26,000

= $18,000

Correct option is a.