A contractor purchases a truck for $45,000. After 3 years, the accumulated depreciation is $22,500 and the contractor sells it for $28,000. What is the gain or loss on the sale?
Correct Answer
C) $5,500 gain
Book value = $45,000 - $22,500 = $22,500. Gain/Loss = Sale Price - Book Value = $28,000 - $22,500 = $5,500 gain.
Why This Is the Correct Answer
To determine gain or loss on asset sale, you must first calculate the book value (original cost minus accumulated depreciation). The book value of $22,500 represents what the asset is worth on the books after depreciation. Since the truck sold for $28,000, which is $5,500 more than its book value of $22,500, this creates a $5,500 gain. The gain occurs because the actual market value exceeded the depreciated book value.
Why the Other Options Are Wrong
Option A: $17,000 loss
This appears to compare the sale price directly to the original purchase price ($45,000 - $28,000 = $17,000), which is incorrect. The proper comparison for gain/loss calculation is between sale price and book value, not original cost.
Option B: $5,500 loss
There is clearly a gain since the sale price of $28,000 exceeds the book value of $22,500. No gain or loss would only occur if the sale price exactly equaled the book value.
Option D: No gain or loss
This incorrectly shows a loss of $5,500. A loss would only occur if the sale price was below the book value. Since $28,000 (sale price) is greater than $22,500 (book value), this must be a gain, not a loss.
Memory Technique
Remember 'SBV' - Sale price vs Book Value (not original cost). If Sale > Book Value = Gain, if Sale < Book Value = Loss.
Reference Hint
Look up 'Asset Depreciation and Disposal' or 'Gain/Loss on Sale of Assets' in accounting or business management chapters
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