Question

On January 1, Year 1, Raven Limo Service, Incorporated paid $74,000 cash to purchase a limousine. The limo was expected to have a five-year useful life and a $14,000 salvage value. On January 1, Year 3 the limo was sold for $46,000 cash. Assuming Raven uses straight-line depreciation, the Company would recognize a

Answer 1

Loss= $4,000

Step-by-step explanation:

Giving the following information:

Purchase price= $74,000

Salvage value= $14,000

Useful life= 5 years

First, we need to calculate the annual depreciation and the accumulated depreciation:

Annual depreciation= (original cost - salvage value)/estimated life (years)

Annual depreciation= (74,000 - 14,000) / 5

Annual depreciation= $12,000

Accumulated depreciation= 12,000*2= $24,000

Now, we determine the book value at the moment of the sale:

Book value= purchase price - accumulated depreciation

Book value= 74,000 - 24,000= $50,000

Finally, if the selling price is higher than the book value, the company gains from the sale.

Gain/loss= 46,000 - 50,000

Loss= $4,000