A Tractor was bought for $ 20,000 on 1 September 2017 with a residual value of $ 2,000. Depreciation was charged at 20% by the diminishing balance method on yearly basis. It was sold for $ 18, 000 after three years of use on 30 September 2020. Compute the profit on the sale of the asset.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A Tractor was bought for $ 20,000 on 1 September 2017 with a residual value of $ 2,000.
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