Big Wave Inc. exchanged an old vehicle for a new vehicle on August 31, 2021. The original cost of the vehicle was $ 45,000 on January 1, 2017. 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, 2021 was $ 21,500. The list price of the new vehicle was $ 30,000. Big Wave 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

The correct answer is A because the company would record a loss on disposal of $3,900. The loss is calculated as the difference between the book value of the old vehicle ($21,500) and the trade-in allowance received ($24,000).