City Taxi Service purchased a new auto to use as a taxi on January 1, Year 1, for $36,000. In addition, City paid sales tax and title fees of $1,200 for the vehicle. The taxi is expected to have a five-year life and a salvage value of $4,000. Required a. Using the straight-line method, compute the depreciation expense for Year 1 and Year 2. b & c. Assume that the taxi was sold on January 1, Year 3, for $22,000. Prepare the general journal entries to record the Year 1 depreciation and sale of the taxi in Year 3.

Solution and Explanation:

answer a) Purchase Price of Taxi = 36000

Sales tax and title fees = 1200

Cost of Taxi = 37200

salvage value = 4000

Depreciable amount = 33200

Life of taxu in n years = 5

Depreciation per year = 66400

Therefore, depreciation for 2016 and 2017 is $66400

Answer b)

year                 particulars                                debit                    credit

2016              depreciation expense                66400

                      Accumulated depreciation on taxi                         66400

2017             depreciation expense                66400

                      Accumulated depreciation on taxi                         66400

Answer c) Sale price of Taxi  - 2000

Book value of taxi                  - 23920 (37200 minus 6640 minus 66400)

Loss on sale value of taxi = 1920

year                 particulars                                debit                    credit

1st january 2018    Loss on sale of taxi            1920

                              Cash                                    22000

                     Accumulated dep on taxi               13280

                                   taxi purchase                                                 37200