Question

City Taxi Service purchased a new auto to use as a taxi on January 1 , Year 1 , for $21,700. In addition, City paid sales tax and title fees of $800 for the vehicle. The taxi is expected to have a five-year life and a salvage value of $5,230. Required

a. Using the straight-line method, compute the depreciation expense for Year 1 and Year 2. (Round your answers to the nearest whole dollar amount.)
b. Assume the auto was sold on January 1 , Year 3 , for $17,931. Determine the amount of gain or loss that would be recognized on the asset disposal. (Round the intermediate calculations to nearest whole dollar amount.)

Answer 1

The depreciation expense for the taxi for Year 1 and Year 2 is $3,454 each year, calculated using the straight-line method. If the taxi was sold on January 1, Year 3, for $17,931, the recognized gain would be $2,339.

Step-by-step explanation:

The student has asked to calculate the depreciation expense for the first two years of a taxi purchased by City Taxi Service and to determine the gain or loss recognized if the auto was sold on January 1, Year 3.

- Depreciation Expense Calculation

To compute the depreciation expense, we must first add the purchase price of the taxi ($21,700) to the additional costs of sales tax and title fees ($800) to determine the total initial cost, which is $22,500. The salvage value at the end of its useful life is $5,230. The depreciable base, which is the total cost minus the salvage value, is $22,500 - $5,230 = $17,270. Since the taxi has a five-year life, the annual depreciation using the straight-line method is $17,270 / 5 = $3,454 per year. Therefore, the depreciation expense for Year 1 and Year 2 is $3,454 each year.

- Gain or Loss on Disposal

To find out the gain or loss on disposal, calculate the book value of the taxi as of January 1, Year 3. After two years of depreciation ($3,454 x 2 = $6,908), the book value is $22,500 (initial cost) - $6,908 (accumulated depreciation) = $15,592. Selling the auto for $17,931 would result in a gain, which is calculated as $17,931 (selling price) - $15,592 (book value) = $2,339. Thus, the gain on the sale of the taxi is $2,339.