Solution:
As per the information given in the question we have
Purchase cost of the Van = £ 10,000
The van was purchased two years ago and is being sold today. Hence the Van has been depreciated for 2 years.
The company depreciates Vans over four years on a straight line basis i.e., useful life = 4 years.
Thus the Annual depreciation expense of the Van = Purchase cost / Useful life
= £ 10,000 / 4
= £ 2,500
Thus Depreciation expense for two years = £ 2,500 * 2
= £ 5,000
Therefore book value at the end of two years = Purchase cost - Depreciation expense for two years
= £ 10,000 - £ 5,000
= £ 5,000
We know that the gain on sale of Van = £ 4,000
The gain on sale of Van can be calculated as follows:
Gain on sale of Van =Sale Value of van – Book value of Van
Applying the available information in the formula we have
£ 4,000 = Sale Value of van - £ 5,000
£ 4,000 + £ 5,000 = Sale Value of van
Sale Value of van = £ 4,000 + £ 5,000
Sale Value of van = £ 9,000
Thus cash received on sale of Van = £ 9,000
The solution is Option c. £ 9,000
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