"On January 1, 2011, Kinnear Company purchased equipment at a cost of $20,000. The equipment has an estimated useful life of 5 years and a salvage value of $2,000. Kinnear Company uses the straight-line depreciation method for all its assets. Given this information, if Kinnear Company sells the equipment for $13,600 on December 31, 2012, it will have a(n):"

The company will have a gain on disposal of $800.

Explanation:

The straight line depreciation method charges a constant depreciation expense throughout the useful life of the asset. The formula for depreciation expense per year under the straight line method is,

Depreciation expense per year = (Cost - Salvage Value) / estimated useful life of the asset

Depreciation expense per year = (20000 - 2000) / 5   =  $3600 per year

The sale would be made after 2 years of using the asset. The accumulated depreciation on the asset at 31 December 2012 will be,

Accumulated depreciation = 3600 * 2 = $7200

The Carrying value of an asset = Cost - Accumulated depreciation

Carrying value at 31 December 2012 = 20000 - 7200 = $12800

If the sales proceeds from selling the asset are more than the carrying value, there is a gain on disposal and vice versa.

Gain/Loss on disposal = 13600 - 12800  =  $800 Gain

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