During the year ended 31 December 2012 a business purchased a vehicle for $23 500. On30 September 2015 it was sold for $3500. Depreciation was charged at 20% per annum using thestraight line method. A full year’s depreciation was charged in the year of purchase and the yearof disposal.What was the profit or loss on disposal of the vehicle?A $1200 lossB $1200 profitC $5900 lossD $5900 profit
Question
During the year ended 31 December 2012 a business purchased a vehicle for 3500. Depreciation was charged at 20% per annum using thestraight line method. A full year’s depreciation was charged in the year of purchase and the yearof disposal.What was the profit or loss on disposal of the vehicle?A 1200 profitC 5900 profit
Solution
To calculate the profit or loss on the disposal of the vehicle, we need to determine the accumulated depreciation and the net book value of the vehicle at the time of disposal.
Step 1: Calculate the annual depreciation expense: The vehicle was purchased for 23,500, which is $4,700.
Step 2: Calculate the accumulated depreciation: Since the vehicle was purchased in 2012 and sold in 2015, the number of years it was owned is 2015 - 2012 = 3 years. Therefore, the accumulated depreciation would be 3 years multiplied by the annual depreciation expense of 14,100.
Step 3: Calculate the net book value at the time of disposal: The net book value is the original cost of the vehicle minus the accumulated depreciation. So, the net book value would be 14,100 = $9,400.
Step 4: Calculate the profit or loss on disposal: The vehicle was sold for 3,500 - 5,900.
Therefore, the correct answer is option C: $5,900 loss.
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