Amanda Company purchased a computer that cost $10,000. It had an estimated useful life of five years and a residual value of $1,000.

The computer was depreciated by the straight-line method and was sold at the end of the third year of use for $5,000 cash.

How much of a gain or loss should Amanda record?

A. A gain of $1,000.

B. A loss of $5,000.

C. A gain of $400.

D. A loss of $400.

C. A gain of $400

Explanation:

To recognize gain or loss on the transaction:

First, the company calculates the carrying amount of the asset by using the original cost of the asset, minus all accumulated depreciation and any accumulated impairment charges.

Then, subtract this carrying amount from the sale price of the asset. If the remainder is positive, it is a gain and if the remainder is negative, it is a loss.

Amanda Company uses straight-line depreciation, Depreciation Expense each year is calculated by following formula:

Depreciation Expense = (Cost of asset - Residual Value) / Useful Life = ($10,000-$1,000) / 5 = $1,800

At the end of the third year:

1. The Accumulated depreciation = $1,800 x 3 = $5,400

2. The carrying amount of the asset = $10,000 - $5,400 = $4,600

Sale price - Carrying amount of the asset = $5,000 - $4,600 = $400 >0

=> The company recognized gain on disposal $400