Exxon Corp. bought an oil rig exactly 6 years ago for $100,000,000. Exxon depreciates oil rigs straight line over 10 years assuming no salvage value. The rig was just sold to British Petroleum for $30,000,000. What Capital Gain/Loss will Exxon report on this transaction?

Question

Quizplus · Accepted Answer

Using straight-line depreciation, after 6 years the accumulated depreciation would be:
Depreciation per year = $100,000,000/10 years = $10,000,000 per year
Accumulated Depreciation = $10,000,000 x 6 years = $60,000,000
Book value of the rig = $100,000,000 - $60,000,000 = $40,000,000

Since the rig was sold for $30,000,000, there is a loss of $10,000,000 ($30,000,000 - $40,000,000 = -$10,000,000). Therefore, Exxon will report a capital loss of $10,000,000 on this transaction.