Question

Martinez owns an asset that cost $87,000 with accumulated depreciation of $40,000. The company sells the equipment for cash of $42,000. At the time of sale, the company should record:a. A gain on sale of $5,000.b. A gain on sale of $2,000.c. A loss on sale of $2,000.d. A loss on sale of $45,000.e. A loss on sale of $5,000.

Answer 1

Answer:

The correct answer is E

Explanation:

The company should be recording either sale or gain on sale of the equipment which is computed as:

Gain or loss on sale = (Asset cost - Depreciation) - Selling amount

where

Asset cost is $87,000

Depreciation amount is $40,000

Selling price is $42,000

Putting the values above:

Gain or loss on sale = ($87,000 - $40,000) - $42,000

Gain or loss on sale = $47,000 - $42,000

Gain or loss on sale = $5,000 (Loss)

So, it is a loss for the company as today value of asset is $47,000, but it is sold for $42,000. Therefore, there is a loss of $5,000 on sale and the company is recording the loss on sale of $5,000.