Strawberry Fields purchased a tractor at a cost of $39,000 and sold it two years later for $25,300. Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $7,000 residual value.
Required:
1. What was the gain or loss on the sale?

Loss on sale of $900

Explanation:

Depreciation is the systematic allocation of estimated cost to an asset usually based on use. when an asset is sold at a price lower than its NBV, a loss is recognized on disposal, otherwise a gain is recognized.

Depreciation = ($39,000 - $7,000)/5 = $6,400

Accumulated depreciation after 2 years = $6,400 × 2 = $12,800

Net book value = $39,000 - $12,800

= $26,200

Gain/(loss) on disposal = $25,300 - $26,200 = ($900)

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