An asset was acquired on October 1, 2018, for $78,000 with an estimated 5-year life and $13,000 residual value. The company uses units-of-production depreciation and expects the asset to produce 20,000 units. Calculate the gain or loss if the asset was sold on March 31, 2021, for $58,000. Actual production was: 2018=500 units; 2019=3,000 units; 2020=3,500 units; 2021=1,000 units.

A) $11,200 gain.

B) $19,000 gain.

C) $6,000 gain.

D) $12,500 gain.

C) $6,000 gain.

Explanation:

For computing the gain or loss, first we have to determine the depreciation expense for each year which is shown below:

Depreciation per units

= (Original cost - residual value) : (estimated production units)

= ($78,000 - $13,000) : (20,000 units)

= ($65,000) : (20,000 units)

= $3.25 per units

Now for the 2018 year, it would be

= Production units in 2018 year * depreciation per unit

= 500 units * $3.25

= $1,625

For the 2019 year, it would be

= Production units in 2019 year * depreciation per unit

= 3,000 units * $3.25

= $9,750

For the 2020 year, it would be

= Production units in 2020 year * depreciation per unit

= 3,500 units * $3.25

= $11,375

For the 2021 year, it would be

= Production units in 2021 year * depreciation per unit

= 1,000 units * $3.25

= $3,250

Now the accumulated depreciation would be

= $1,625 + $9,750 + $11,375 + $3,250

= $26,000

Now the book value would be

= Acquired value of an asset - accumulated depreciation

= $78,000 - $26,000

= $52,000

So, the gain would be

= Sale value - book value

= $58,000 - $52,000

= $6,000 gain