On January 1, 2012, Lasche Auto Sales and Service purchased a vehicle for use in the business at a cost of $22,000.The vehicle has a 4-year useful life with an expected residual value of $2,000.The company has a December 31 year-end and uses straight-line depreciation for all capital assets.On January 1, 2014, the company sold the vehicle for proceeds of $8,000. What gain or loss did Lasche Auto report on its 2014 income statement?

Question

Quizplus · Accepted Answer

To determine the gain or loss on the sale of the vehicle, we first need to determine its book value (i.e. carrying value) on January 1, 2014:
Original cost: $22,000
Less: Depreciation expense for 2012 and 2013 ($22,000 - $2,000)/4 x 2 years: $10,500
Book value on January 1, 2014: $11,500
Since the proceeds from the sale ($8,000) are less than the book value ($11,500), there is a loss on the sale. The amount of the loss is the difference between the book value and the proceeds:
Book value on January 1, 2014: $11,500
Less: Proceeds from sale: $8,000
Loss on sale: $3,500
Therefore, the answer is C) $4,000 loss (not $3,000 loss as the book value should be $11,500 instead of $15,500).

On January 1, 2012, Lasche Auto Sales and Service Purchased