Question 7.4: To illustrate this point, consider a machine that cost $10,0...
To illustrate this point, consider a machine that cost $10,000 and is being depreciated on the basis of a four-year useful life with no removal cost or salvage value expected. At the end of the third year of use, the machine is retired with net salvage value of $1,000. Compute the amount of gain or loss that would be recognized assuming that the asset is being depreciated by use of straight-line depreciation.
Using straight-line depreciation, the depreciation deduction is $2,500 per year. The accumulated depreciation at the end of year 3 would be $7,500. Book value at the end of year 3 would be
Asset Cost $10,000
Less: Accumulated Depreciation 7,500
Book Value $ 2,500
Calculation of Loss:
Book Value $ 2,500
Net Salvage 1,000
Loss on Retirement $ 1,500