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?

Effect on income = $6,100 gain

Explanation:

Giving the following information:

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.

First, we need to calculate the accumulated depreciation:

Annual depreciation = (original cost - salvage value) / estimated life (years)

Annual depreciation = (39,000 - 7,000) / 5 = 6,400

Accumulated = 6,400*2 = 12,800

Now, we can determine the loss or profit:

Effect on income = selling price - book value

Effect on income = 25,300 - (32,000 - 12,800) = 6,100 gain

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)