Question

A farm purchased a new tractor for $30,000. They estimated the tractor would have a useful life of 5 years and would have a salvage value of $5,000. The farm uses the straight-line method and the half-year convention. The farm sold the tractor during year 3 for $19,000.

1. Compute the amount of depreciation expense to be taken in years 1, 2 and 3

Year 1

Year 2

Year 3

2. Prepare a journal entry to record the sale of the tractor in year 3.

Answer 1

		Computation of annual depreciation
	i	Cost =	30000
	ii	Salvage value=	5000
	iii=i-ii	Depreciable cost	25000
	iv	usefull life =	5
	v=iii/iv	Annual depreciation=	5000
		1. Compute the amount of depreciation expense to be taken in years 1, 2 and 3
				Amount
		Year 1	5000/2	2500	<< Since we are using half year convention>>
		Year 2		5000
		Year 3		5000
		2 Prepare a journal entry to record the sale of the tractor in year 3.
	i	cost		30000
	ii	Total depreciation =		12500
	iii=i-ii	Written down value =		17500
	iv	sales price =		19000
	v=iv-iii	Profit on sale		1500
		Journal entry
		Account		Dr	Cr
		Cash		19000
		Profit on sale			1500
		tractor			17500