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mixas84 [53]
2 years ago
8

Green Garden Company purchased a tractor at a cost of $240,000. The tractor has an estimated residual value of $40,000 and an es

timated life of 8 years, or 10,000 hours of operation. The tractor was purchased on January 1, 2018, and was used 2,400 hours in 2018 and 2,100 hours in 2019. On January 1, 2020, the company decided to sell the tractor for $140,000. Green Garden Co. uses the units-of- production method to account for the depreciation on the tractor. Based on this information, the entry to record the sale of the tractor will show
a. No gain or loss on the sale
b. A loss of $15,000
c. A loss of $10,000
d. A gain of $30,000
Business
1 answer:
Marizza181 [45]2 years ago
6 0

Answer:

The correct answer is Option C.

Explanation:

The unit-of-production method is used when the asset value closely relates to the units of output it is able to produce. It is expressed with the formula below:

(Original Cost - Salvage value) / Estimated production capacity x Units/year

At Year 2018, depreciation expense (DE) is: ($240,000 - $40,000) / 10,000 operating hours x 2,400 hours = $48,000

At Year 2019, depreciation expense (DE) is: ($240,000 - $40,000) / 10,000 operating hours x 2,100 hours = $42,000

Accumulated depreciation for 2 years is $48,000 + $42,000 = $90,000.

Note that this depreciation method results in higher depreciation charge when the asset is heavily used, at this time, it was in Year 2018.

The net book value (NBV) of the asset becomes $240,000 - $90,000 = $150,000

Gain or (loss) on disposal = Sales proceed - NBV

Gain or (loss) on disposal = $140,000 - $150,000

Loss on disposal =$10,000

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