Q.1Alexander Company purchased a piece of equipment for $12,000 and depreciated it for three years over a five-year estimated life with an expected residual value at the end of five years of $2,000. At the end of the third year, Alex decided to upgrade to equipment with increased capacity and sold the original piece of equipment for $7,200. Calculate the gain or loss on the disposal at the end of the third year.

gain of $3,200

Explanation:

The equipment cost $12,000.

The depreciable amount = Cost price - salvage value

=$12,000 -$ 2,000

=$10,000

The equipment was being depreciated over five years. The depreciation rate will be

=1/5 x 10=0.2

=20%

Depreciation per year will be

=20/100 x $10,000

=0.2 x $10,000

=$2,000 per year

Depreciation for 3 years

=$2,000 x 3

=$6,000

The book value of the equipment after three years will be

=cost price - accumulated depreciation

=$10,000 - $6,000

=$4,000

The equipment was sold for $7,200

the gains will be selling price - book value

=$7,200 - $4,000

=$3,200

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