Question

Computing Depreciation, Asset Book Value, and Gain or Loss on Asset Sale Palepu Company owns and operates a delivery van that originally cost $27,200. Straight-line depreciation on the van has been recorded for three years, with a $2,000 expected salvage value at the end of its estimated six-year useful life. Depreciation was last recorded at the end of the third year, at which time Palepu disposes of this van. a. Compute the net book value of the van on the sale date s o b. Compute the gain or loss on sale of the van if its sales price is for: (When applicable, use a negative sign with answers to indicate there is a loss on sale.) 1. Cash equal to book value of van. 2$15,000 cash $12,000 cash.

Answer 1

a)

Depreciation as per straight line method

= (Purchase cost – Salvage value) / Useful life

= ($27,200 - $2,000) / 6

= $4,200 per year

Accumulated depreciation for three years

= Depreciation per year x Number of years

= $4,200 x 3

= $12,600

So, book value at the end of three years

= Purchase cost – Accumulated Depreciation

= $27,200 - $12,600

= $14,600

b)

1) Sale price = Book value = $14,600

So, Gain / Loss = Sales price – Book value

= $14,600 - $14,600

= 0 (No profit, No loss)

2) Sales price = $15,000

So, Gain / Loss = $15,000 - $14,600

= $400 (Gain)

3) Sales price = $12,000

So, Gain/ Loss = $12,000 - $14,600

= - $2,600 (Loss of $2,600)