A company purchases a machine with an expected useful life of 6 years for $1,500. After two years of use, management revised the expected useful life to 8 years. The machine is to be depreciated at 20% per annum on the reducing balance basis. A full year’s depreciation is charged in the year of purchase, with none in the year of sale. During year 4, it is sold for $750.
What is the profit or loss on disposal?
Answer
Depreciation = beginning net book value x Depreciation rate
Carrying amount (net book value) = cost – accumulated depreciation or
Carrying amount (Year n) = cost x (1-depreciation rate)^n
| $ | |
| Carrying amount: 1,500 x 0.8 x 0.8 x 0.8 | 768 |
| Proceeds of sale | (750) |
| Loss on disposal | 18 |