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A pizza outlet has a delivery truck that was purchased on January 1, 2013 for $50,000. The truck was depreciated using the straight-line method. The residual value expected at the end of its 10-year useful life was $5,000. On January 1, 2020, the truck was exchanged for a used SUV with a fair value of $20,000. What was the gain or loss that occurred as a result of the exchange?Select answer from the options belowloss on disposal, $1,500 gain on disposal, $1,500 loss on disposal, $3,500 gain on disposal, $6,500

Question

A pizza outlet has a delivery truck that was purchased on January 1, 2013 for 50,000.Thetruckwasdepreciatedusingthestraight−linemethod.Theresidualvalueexpectedattheendofits10−yearusefullifewas50,000. The truck was depreciated using the straight-line method. The residual value expected at the end of its 10-year useful life was 5,000. On January 1, 2020, the truck was exchanged for a used SUV with a fair value of 20,000.Whatwasthegainorlossthatoccurredasaresultoftheexchange?Selectanswerfromtheoptionsbelowlossondisposal,20,000. What was the gain or loss that occurred as a result of the exchange?Select answer from the options belowloss on disposal, 1,500 gain on disposal, 1,500 lossondisposal,1,500 loss on disposal, 3,500 gain on disposal, $6,500

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Solution

First, we need to calculate the book value of the truck at the time of the exchange.

The truck was purchased for 50,000andwasexpectedtohavearesidualvalueof50,000 and was expected to have a residual value of 5,000 after 10 years. This means that the total depreciation over the 10-year life of the truck is 50,000−50,000 - 5,000 = $45,000.

Using the straight-line method of depreciation, the truck depreciates at a rate of 45,000/10years=45,000 / 10 years = 4,500 per year.

By January 1, 2020, the truck has been depreciated for 7 years (from 2013 to 2019 inclusive), so the total depreciation is 7 years * 4,500/year=4,500/year = 31,500.

The book value of the truck at the time of the exchange is therefore the original cost minus the accumulated depreciation, or 50,000−50,000 - 31,500 = $18,500.

The truck was exchanged for an SUV with a fair value of $20,000.

The gain or loss on the exchange is the fair value of the SUV minus the book value of the truck, or 20,000−20,000 - 18,500 = $1,500.

Since the fair value of the SUV is greater than the book value of the truck, this is a gain on disposal.

So, the answer is "gain on disposal, $1,500".

This problem has been solved

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