On January 1st 2016 the Hail Company purchased a tractor for $120,000. This trac

ID: 2402407 • Letter: O

Question

On January 1st 2016 the Hail Company purchased a tractor for $120,000. This tractor is expected to last 12 years and have a $2400 salvage value Hail expects to drive the tractor 470400 miles . In 2016 Hail drove the tractor 80,000 miles; in 2017 Hail drove the tractor 127,000 miles Part 1: fill in the following table 2016 2017 2016 2017 dep exp dep exp book value book value straight line depreciation double declining depreciation units of activity depreciation Part 2: On January 1st 2018 Hail sold the tractor for $62,000. If Hail was using double declining balance depreciation, what gain or loss do they show on the sale? On January 1st 2016 the Hail Company purchased a tractor for $120,000. This tractor is expected to last 12 years and have a $2400 salvage value Hail expects to drive the tractor 470400 miles . In 2016 Hail drove the tractor 80,000 miles; in 2017 Hail drove the tractor 127,000 miles Part 1: fill in the following table 2016 2017 2016 2017 dep exp dep exp book value book value straight line depreciation double declining depreciation units of activity depreciation Part 2: On January 1st 2018 Hail sold the tractor for $62,000. If Hail was using double declining balance depreciation, what gain or loss do they show on the sale?

Explanation / Answer

Part 1

Depreciation according to straight line method

Annual depreciation = (cost - salvage value) / estimated life = (120000-2400)/12 = 9800

Depreciation rate according to double declining balance

Depreciation rate = 1/ estimated life *2 = 1/12 *2 = 16.67%

2016 depreciation = 120000*16.67% = 20004

2017 depreciation = (120000-20004)*16.67% = 16669

Depreciation rate according to units of production

Depreciation rate = (cost - salvage value) / total estimated miles = (120000-2400)/470400 = 0.25 per mile

2016 depreciation = depreciation rate per mile * miles drove = 0.25*80000 = 20000

2017 Depreciation = 0.25*127000 = 31750

110200

(120000-9800)

100400

(110200-9800)

99996

(120000-20004)

83327

(99996-16669)

100000

(120000-20000)

68250

(100000-31750)

Part 2

Selling price at the end of 2 years = 62000

Book value at the end of 2 years (according to double declining depreciation) = 83327

Book value is higher than selling price so there is loss.

Loss = book value - selling price =83327-62000 =21327

2016 2017 2016 2017 depreciation depreciation book value book value Straight line depreciation 9800 9800