Question

City Taxi Service purchased a new auto to use as a taxi on January 1, Year 1, for $28,000. In addition, City paid sales tax and title fees of $1,480 for the vehicle. The taxi is expected to have a five-year life and a salvage value of $5,780.

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 $23,000. Prepare the general journal entries to record the Year 1 depreciation and sale of the taxi in Year 3.

Answer 1

a)

Straight line Method
Cost of Tax ($28,000+$1,480)	$ 29,480
Less: Salvage value	$ (5,780)
Depreciable value	$ 23,700
Life of Asset	5 Years
Depreciation per year ($23,700/5)	$     4,740
Depreciation per year 1	$     4,740
Depreciation per year 2	$     4,740

b)

Account title	Debit	Credit
Depreciation Expense	$     4,740
Accumulated depreciation - Plant Assets		$     4,740

c)

Account title	Debit	Credit
Cash	$   23,000
Accumulated depreciation - Plant assets ($4,740*2)	$     9,480
Plant Assets		$   29,480
Gain on sale of assets		$     3,000

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