Question

Computing Depreciation, Net Book Value, and Gain or Loss on Asset Sale

Lynch Company owns and operates a delivery van that originally cost $46,400. Lynch has recorded straight-line depreciation on the van for four years, calculated assuming a $5,000 expected salvage value at the end of its estimated six-year useful life. Depreciation was last recorded at the end of the fourth year, at which time Lynch disposes of this van.
A. Compute the net book value of the van on the disposal date.
B. Compute the gain or loss on sale of the van if the disposal proceeds are:
1. A cash amount equal to the van's net book value.
2. $22, 500 cash.
3. $18, 500 cash.

Answer 1

Answer and Explanation:

The computation is shown below:

A. The net book value is

Before that the depreciation expense is

Depreciation per year is

= (Purchase Cost - Residual value) ÷ (Useful life)

= ($46,400 - $5,000) ÷ (6)

= $6,900

Now

A. The Netbook value as on disposal date is

= $46,400 - ($6,900 × 4 years)

= $18,800

B. The gain or loss on the sale of the van is

1. The equivalent amount i.e. gain is $18,800

2. The gain is

= $22,500 - $18,800

= $3,700

3. The loss is

= $18,500 - $18,800

= -$300