Smith Steakhouse is a restaurant catering to a variety of customers. They purcha

Question

Smith Steakhouse is a restaurant catering to a variety of customers. They purchased a new high power oven at a cost of $100,000 on January 1, 2006. The oven has an expected useful life of four years and an estimated salvage value of $10,000. Smith Steakhouse uses straight-line depreciation for all of its depreciable assets.

On May 1, 2008, the owner of the restaurant was persuaded to purchase a new oven that operated more efficiently. The old oven was sold at that time for $15,000.
a. What is the amount of depreciation expense recorded on the old machine for each year of use? Show your computations.
b. What is the amount of gain or loss on the disposal of the old machine? Show your computations.

Explanation / Answer

Depreciation in 2006 is ((100000-10000)/28)12=38571.43 Depreciation in 2007 is ((100000-10000)/28)12=38571.43 Depreciation in 2008 is ((100000-10000)/28)4=12857.14 3) Amount of gain is 15,000-10,000 = $5000

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