Use the following information for question 166 - 167.
Maverick Inc. exchanged an old vehicle for a new vehicle on August 31, 2014. The original cost of the vehicle was $45,000 on January 1, 2010. Depreciation was calculated using the straight line method over a ten-year useful life, with an estimated residual value of $3,000. The fair value of the old vehicle on August 31, 2014 was $21,500. The list price of the new vehicle was $30,000. Maverick received a $24,000 trade in allowance from the dealership and paid $6,000 cash for the new vehicle.
-As a result of this transaction, the company would record which of the following?
A) DR. Loss on Disposal $3,900
B) CR. Vehicle $23,500
C) CR. Gain on Disposal $3,900
D) Cr. Cash $24,000

Question

Quizplus · Accepted Answer

Loss on disposal is calculated as the difference between the book value of the old vehicle and the fair value received. Book value is calculated as the original cost minus accumulated depreciation. Accumulated depreciation is calculated as the depreciation expense per year multiplied by the number of years the asset has been in use. In this case, the depreciation expense per year is ($45,000 - $3,000) / 10 = $4,200. The old vehicle has been in use for 4 years and 8 months, so the accumulated depreciation is $4,200 * 4.67 = $19,584. Therefore, the book value of the old vehicle is $45,000 - $19,584 = $25,416. The loss on disposal is $25,416 - $21,500 = $3,916.

Use the Following Information for Question 166 - 167