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A truck (cost $35,000) has Accumulated Depreciation of $28,000 at 31 December 2013 and depreciates $7,000 per year. It is traded in on 1 July 2014 for a $40,000 truck with a $5,000 trade-in allowance. After updating depreciation, what gain or loss arises?
ALoss of $2,000
BGain of $1,500
CGain of $3,500
DLoss of $1,500
Answer & Solution
Correct answer: B. Gain of $1,500
1. Update depreciation for 6 months: $\$7{,}000 \times 6/12 = \$3{,}500$.
2. Accumulated Depreciation at 1 Jul 2014 $= \$28{,}000 + \$3{,}500 = \$31{,}500$.
3. Carrying amount $= \$35{,}000 - \$31{,}500 = \$3{,}500$.
4. Trade-in allowance = $5,000, which exceeds carrying amount.
5. Gain $= \$5{,}000 - \$3{,}500 = \$1{,}500$.
6. Option A ignores the extra 6 months of depreciation; C is the catch-up depreciation; D mistakes the gain for a loss.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.7.1 "Exchanging a Fixed Asset (partial year)", p.171_
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