A contractor's equipment has an original cost of $120,000 and accumulated depreciation of $75,000. If sold for $52,000, what is the gain or loss on disposal?
Correct Answer
B) $7,000 gain
Book value = $120,000 - $75,000 = $45,000. Since the equipment sold for $52,000, there is a gain of $52,000 - $45,000 = $7,000.
Why This Is the Correct Answer
To determine gain or loss on disposal, you must first calculate the book value (original cost minus accumulated depreciation). The book value is $120,000 - $75,000 = $45,000. Since the equipment was sold for $52,000, which is more than the book value, there is a gain of $52,000 - $45,000 = $7,000. When the selling price exceeds book value, it always results in a gain.
Why the Other Options Are Wrong
Option A: $7,000 loss
This incorrectly shows a $7,000 loss instead of a gain. A loss would only occur if the selling price ($52,000) was less than the book value ($45,000), but since the selling price is higher, it's a gain.
Option C: $68,000 loss
This calculates the difference between original cost and selling price ($120,000 - $52,000 = $68,000) which is not the correct method. You must use book value, not original cost, to determine gain or loss.
Memory Technique
Remember 'BOSS': Book value = Original cost - accumulated depreciation, then Selling price compared to book value determines gain/loss
Reference Hint
Look up 'Asset Disposal' or 'Depreciation and Asset Management' in accounting or business management chapters of contractor reference materials
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