Alexander Company purchased a piece of equipment for $14,000 and depreciated it

Question

Alexander Company purchased a piece of equipment for $14,000 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 $7,500.

Calculate the gain or loss on the disposal at the end of the third year.

Alexander Company purchased a piece of equipment for $14,000 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 $7,500.

Explanation / Answer

Cost of the equipment =$14,000

Residual value at the end of 5 years=$2000

Thus depreciation per year =(Cost of the equipment-Residual Value)/Usefu; Life of the equipment

                                             =$(14000-2000)/5

                                             =$2400 per year

Thus depreciation for 3 years=$2400*3

                                               =$7200

Hence value at end of 3 years=Cost-depreciation for 3 years

                                                =$(14000-7200)

                                                =$6800

Now,Selling price of the equipment =$7500

Thus gain on the disposal at the end of the third year =Selling price-Value at the end of 3rd year

                                                                                      =$(7500-6800)

                                                                                     =$700

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