Louisville Farms, a breeder of racehorses, paid $432,000 cash for a prize-winnin

Question

Louisville Farms, a breeder of racehorses, paid $432,000 cash for a prize-winning stallion on January 1, 2003. The stallion is depreciated on a straight-line basis, with depreciation for partial years rounded to the nearest month. Estimated useful life was nine years, with no residual value. After owning the animal for six years and five months, Louisville Farms sold the stallion on May 31, 2009, for cash of $85,000. Depreciation had last been recorded on December 31, 2008. a Compute to the nearest full month depreciation for the fractional period from January 1, 2009 to May 31 of 2009. $______________ b Compute the book value of the stallion at May 31, 2009, the date of sale. $______________ c Compute the gain or loss on the sale of the stallion. $______________ (gain/loss)

Explanation / Answer

Cash paid for Stallion in Jan 1, 2003 $432,000 Dep. Per Annum as per Straight Line Method            48,000 ($432000/9 Years) Dep For 5 Months - Jan. 1, 2009 to May 31, 2009 20000 ($48000 X 5/12) Answer a. Depreciation for the fractional period from January 1, 2009 to May 31 of 2009 20000 Answer b. Calculation of Book Value of Stallion on May 31, 2009 Cash Paid for Stallion in Jan 1, 2003          432,000 Less: Dep. From Jan 1, 2003 to Dec. 31, 2008          240,000 ($48000 X 5 Years) Balance as on Dec. 31, 2008          192,000 Less: Dep For 5 Months - Jan. 1, 2009 to May 31, 2009            20,000 Book Value as on May 31, 2009          172,000 Answer c. Calculation of Gain / (Loss) on Sale of Stallion Stallion sold on May 31, 2009            85,000 Less: Book Value as on May 31, 2009          172,000 Profit / (Loss) on sale of Stalion          (87,000)

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