Steve Company purchased a tractor at a cost of $180,000. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years, or 10,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,100 hours in 2020. On January 1, 2021, the company decided to sell the tractor for $70,000. Steve 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 $38,000
C) A loss of $70,000
D) A gain of $70,000

Question

Quizplus · Accepted Answer

Rate = ($180,000 - $20,000) / 10,000 hours = $16 per hour
Expense for 2 years = $16 x 4,500 hours = $72,000
Gain (loss) on sale = Selling price - Book value = $70,000 - ($180,000 - $72,000) = $38,000 loss

Steve Company Purchased a Tractor at a Cost of $180,000