City Taxi Service purchased a new auto to use as a taxi on January 1, Year 1, for $23,200. In addition, City paid sales tax and title fees of $750 for the vehicle. The taxi is expected to have a five-year life and a salvage value of $6,280. Required a. Using the straight-line method, compute the depreciation expense for Year 1 and Year 2. (Round your answers to the nearest whole dollar amount.) b. Assume the van was sold on January 1, Year 3, for $19,414. Determine the amount of gain or loss that would be recognized on the asset disposal. (Amounts to be deducted should be indicated with minus sign. Round the intermediate calculations to nearest whole dollar amount.)

Depreciation under straight line method = $3,534

Gain/Loss recognized on the asset disposal = $2,532

Explanation:

1. The computation of depreciation expense for Year 1 and Year 2 is shown below:-

Assets cost = Purchase price + Sales tax and tittle fee

= $23,200 + $750

= $23,950

Depreciation under straight line method = (Assets cost - Salvage value) ÷ Useful life

= ($23,950 - $6,280) ÷ 5

= $17,670 ÷ 5

= $3,534

2. The computation of Gain/Loss recognized on the asset disposal is shown below:-

Total depreciation = Year 1 Depreciation + Year 1 Depreciation

= $3,534 + $3,534

= $7,068

Book value as on sale = Assets cost - Total depreciation

= $23,950 - $7,068

= $16,882

Gain/Loss recognized on the asset disposal = Assets sold - Book value on sale

= $19,414 - $16,882

= $2,532

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