A company sold a machine for $15,000 in cash. The machine originally cost $38,000 and accumulated depreciation was $20,000. What's the gain or loss on the sale of machinery?
O $3,000 gain
O $3,000 loss
O $15,000 gain
O $18,000 loss
The correct answer and explanation is:
Correct Answer: $3,000 loss
Explanation:
To determine the gain or loss on the sale of the machinery, we use the formula:
[
\text{Gain or Loss} = \text{Selling Price} – \text{Book Value}
]
where:
- Selling Price = $15,000
- Original Cost = $38,000
- Accumulated Depreciation = $20,000
- Book Value = Original Cost – Accumulated Depreciation
[
\text{Book Value} = 38,000 – 20,000 = 18,000
]
Now, we calculate the gain or loss:
[
\text{Gain or Loss} = 15,000 – 18,000 = -3,000
]
Since the result is negative, it represents a loss of $3,000.
Understanding the Concept:
The book value represents the machine’s worth on the company’s accounting records after depreciation is considered. When the machine is sold for less than its book value, the company incurs a loss. Conversely, if it were sold for more than the book value, it would be a gain.
In this case:
- The company originally purchased the machine for $38,000.
- Over time, depreciation of $20,000 was recorded, reducing its book value to $18,000.
- However, the company only managed to sell it for $15,000, which is $3,000 less than the book value.
- This shortfall is recorded as a loss on sale of machinery in financial statements.
Thus, the correct answer is “$3,000 loss” since the company received less than the book value for the machine.
Here is an infographic illustrating the financial breakdown of the machine sale, including cost, depreciation, book value, selling price, and the resulting loss. Let me know if you need any modifications!
