Question

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?

	a.	Gain of $30,000,000
	b.	Gain of $10,000,000
	c.	Loss of $10,000,000
	d.	Loss of $30,000,000

Answer 1

Depreciation on Straight line method = (/ Historical cost - salvage value ) / useful life

Historical cost = 100000000

Salvage value = 0

Useful life = 10

Depreciation per year =( 100000000 -0 )/ 10 = 10,000,000

Remaining value of oil rig after 6 years = Historical cost - depreciation for 6 years  

= 100,000,000 - 60,000,000

=40,000,000

Capital Gain = Sale value of asset - Remaining value of asset at time of sale

= 30,000,000 - 40,000,000

= - 10,000,000

The ans is c . Loss of $ 10,000,000