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Watson Packaging sold a machine for $15,000. The company bought this machine for $40,000 seven years ago and was depreciating it on a straight-line basis over ten years to a $4,000 salvage value. What is the gain (loss) that Watson Packaging should report?

Answer: Book value = Historical cost - Accumulation depreciation = $40,000 - (7 years × $3,600 per year) = $14,800
When an asset is sold, the company recognizes a gain (loss) equal to the difference between selling price and its carrying value reported on the balance sheet.
Gain (loss) on sale = Selling price of asset - Net book value
Gain (loss) on sale = $15,000 ? $14,800 = $200
This gain is reported in income from continuing operations, and causes an increase in reported income.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9950650

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