Q.1Alexander Company purchased a piece of equipment for $12,000 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 $7,200. Calculate the gain or loss on the disposal at the end of the third year.
The value of an asset decreases with usage and time. This decreased value is called depreciation.
Cost of equipment is $12,000
Estimated life is 5 years
Residual value is $2000
= (12000 - 2000) \ 5
= $2000 per year
Value of equipment at the end of first year is $12000 - 2000 = $10000
Value of equipment at the end of 2nd year is $10000 - 2000 = $8000
Value of equipment at the end of 3rd year is $8000 - 2000 = $6000
Sale price of equipment at the end of 3rd year = $7,200
Book value of equipment at the end of 3rd year = $6000
Gain on disposal of equipment = 7200 - 6000
Therefore, the gain on disposal of equipment is $1200