Ott Co. purchased a machine at an original cost of $90,000 on January 2, Year 1. The estimated useful life of the machine is 10 years, and the machine has no salvage value. Ott uses the straight-line method to calculate depreciation. On July 1, Year 10, Ott sold the machine for $5,000. What is the amount of gain or loss on the disposal of the machine?
a) $500 loss
b) $500 gain
c) $4,500 loss
d) $4,500 gain

The answer is B.

Explanation:

Straight line method of depreciation is:

Cost of the asset minus salvage value/number of years

Cost of the machine is $90,000

Salvage value is $0

Number of useful life is 10 years

So we have,

90,000/10

Depreciation = $9,000

So $9,000 will bee charged yearly($90,000 will be reducing by $9,000 yearly).

The number of years from January 2 year 1 through July 1 year 10 is 9 years and 6months

6 months is half a year.

Depreciation to be recognized is;

9 x $9000 + 9000/2(half a year)

$81,000 + $4,500

$85,500

Therefore, the carrying value of the asset at July 1, year 10 is

$90,000 - $85,500

$4,500

The machine was sold for $5,000.

The sales price is greater than carrying amount at the time of sale. This means that there is a gain

So the gain is $5,000 - $4,500

Gain of $500

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