Question

E6-34. Computing Depreciation, Net Book Value, and Gain or Loss on Asset Sale :05) Palepu Company owns and operates a delivery van that originally cost $27,200. Palepu has recorded straight-line depreciation on the van for three years, calculated assuming 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 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. $15,000 cash 3. $12,000 cash.

Answer 1

Answer

• Working

A	Cost	$            27,200.00
B	Residual Value	$              2,000.00
C=A - B	Depreciable base	$            25,200.00
D	Life [in years]	6
E=C/D	Annual SLM depreciation	$              4,200.00

>Three year’s depreciation = $ 4200 x 3 = $ 12600

• Requirement [a]

Net Book Value = $ 27200 – 12600 = $ 14,600

• Requirement [b]

		Case #1	Case #2	Case #3
A	Book Value at time of disposal	$14,600	$14,600	$14,600
B	Sale price	$14,600	$15,000	$12,000
C = B - A	Amount of Gain or (Loss)	$0	$400	($2,600)