Miss Granny purchased a machine amounting to $700,000 on January 1, 2013 providing the newest kind of technology to improve their operations. It has a useful life of 20 years and a salvage value of $50,000. However, on June 30, 2018, they decided to dispose it to liquidate some of its debts. Therefore, they classified it as held for sale. The fair value of the machine on that date $510,000 and the cost of disposal is $10,000. On November 30, 2019, the company decided again to continue to use it since they were able to obtain funding from their investors through follow-on offering of additional shares to pay their currently maturing obligations. On this date, the fair value of the machine is $490,000 and the cost of disposal is $5,000. How much is the gain or loss in the reclassification in 2019?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Miss Granny purchased a machine amounting to $700,000 on January 1, 2013 providing the newest kind of technology to improve their operations. It has a useful life of 20 years and a salvage value of $50,000. However, on June 30, 2018, they decided to dispose it to liquidate some of its debts. Therefore, they classified it as held for sale. The fair value of the machine on that date $510,000 and the cost of disposal is $10,000. On November 30, 2019, the company decided again to continue to use it since they were able to obtain funding from their investors through follow-on offering of additional shares to pay their currently maturing obligations. On this date, the fair value of the machine is $490,000 and the cost of disposal is $5,000. How much is the gain or loss in the reclassification in 2019?
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