On January 1, year 1, Crater, Inc. purchased equipment having
an estimated salvage value equal to 20% of its original cost at
the end of a ten-year life. The equipment was sold December 31,
year 5, for 50% of its original cost. If the equipment’s disposition
resulted in a reported loss, which of the following depreciation
methods did Crater use?

(c) After reviewing the different methods, you might
realize that the method with the highest carrying amount would
result in a loss as shown below, where C is equal to the asset’s
original cost.
Gain/loss = Proceeds – Carrying amount
= 50% C – [C – 50% (C – S)]
= 50% C – [C – 50% (C – 20%C)]
= .5C – [1.00C – .5(1.00C – .2C)]
= .5C – [.6C]
Carrying amount > Proceeds
∴Loss
Straight-line depreciation would result in the highest carrying
value.
(c) After reviewing the different methods, you might
realize that the method with the highest carrying amount would
result in a loss as shown below, where C is equal to the asset’s
original cost.
Gain/loss = Proceeds – Carrying amount
= 50% C – [C – 50% (C – S)]
= 50% C – [C – 50% (C – 20%C)]
= .5C – [1.00C – .5(1.00C – .2C)]
= .5C – [.6C]
Carrying amount > Proceeds
∴Loss
Straight-line depreciation would result in the highest carrying
value.