How would we calculate the gain or loss from the sale of equipment? Can you provide an example?
To calculate the gain or loss from the sale of equipment, you need to compare the sale price with the book value of the equipment. The book value represents the original purchase cost of the equipment minus any accumulated depreciation.
Here's an example to illustrate the calculation:
Let's say you purchased a machine for $10,000 and estimated its useful life to be 5 years with no salvage value. Each year, you depreciated the machine by $2,000 using the straight-line method, which means you deducted $2,000 from its value each year.
After 3 years, you decide to sell the machine for $6,000. To calculate the gain or loss from the sale, follow these steps:
Step 1: Calculate the accumulated depreciation.
Accumulated Depreciation = (Annual Depreciation) x (Number of Years)
In this case, Accumulated Depreciation = $2,000 x 3 years = $6,000.
Step 2: Calculate the book value.
Book Value = Purchase Cost - Accumulated Depreciation
In this case, Book Value = $10,000 - $6,000 = $4,000.
Step 3: Calculate the gain or loss.
Gain or Loss = Sale Price - Book Value
In this case, Gain or Loss = $6,000 - $4,000 = $2,000.
In this example, the gain from the sale of the equipment is $2,000.
Remember, if the sale price is higher than the book value, it will result in a gain. Conversely, if the sale price is lower than the book value, it will result in a loss.