Homework SourseOn January 1st 2016 the Hail Company purchased a tractor for
| 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? | |||||||||||||
Solution
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 | 110200 (120000-9800) | 100400 (110200-9800) |
| Double declining depreciation | 20004 | 16669 | 99996 (120000-20004) | 83327 (99996-16669) |
| Unit of activity depreciation | 20000 | 31750 | 100000 (120000-20000) | 68250 (100000-31750) |
