Question

City Taxi Service purchased a new auto to use as a taxi on January 1, Year 1, for $20,800. In addition, City paid sales tax and title fees of $960 for the vehicle. The taxi is expected to have a five-year life and a salvage value of $6,850.

Required
a. Using the straight-line method, compute the depreciation expense for Year 1 and Year 2.
b & c. Assume that the taxi was sold on January 1, Year 3, for $18,165. Prepare the general journal entries to record the Year 1 depreciation and sale of the taxi in Year 3.

Answer 1

Ans. A	Cost of assets (auto)   = Purchase price + Sales tax and title fees
	$20,800 + $960
	$21,760
	Straight line depreciation = (Cost of asset - Residual value) / Useful life in years
	($21,760 - $6,850) / 5
	$14,910 / 5
	$2,982
	*In Straight line method the depreciation is equal in each year.
	Year	Depreciation
	1	$2,982
	2	$2,982
	Accumulated depreciation	$5,964
Ans. 2
No.	Particulars	Debit	Credit
1	Depreciation expenses	$2,982
	Accumulated depreciation - Auto		$2,982
	(To record depreciation for year 1)
Ans. 3
No.	Particulars	Debit	Credit
2	Cash	$18,165
	Accmulated depreciation on auto	$5,964
	Asset (auto)		$21,760
	Gain on sale of Auto		$2,369
	(Equipment sold on loss)
	*Calculations:
	Total cost	$21,760
	Less: Accumulated depreciation for 2 years	$5,964
	Book value	$15,796
	Gain on sale of auto =    Sales value - Book value at the time of sale
	$18,165 - $15,796
	$2,369