A company purchased machinery for $150,000. The machinery has an estimated useful life of 10 years and a residual value of $10,000.

Requirements:

1. Calculate the annual depreciation expense using the straight-line method.
2. Prepare a depreciation schedule for the first 5 years.
3. Determine the book value of the machinery at the end of year 5.
4. If the company uses the machinery for only 8 years before selling it for $20,000, calculate the gain or loss on the sale.

Explain how the depreciation expense impacts the company’s financial statements.