City Taxi Service purchased a new auto to use as a taxi on January 1, 2016, for $36,000. In addition, City paid sales tax and titles 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-lined method, compute the depreciation expense for 2016 and 2017.

b. Prepare the general journal entry to record the 2016 depreciation.

c. Assume that the taxi was sold on January 1, 2018, for $22,000. Prepare the journal entry for the sale in 2018.

Note: Any costs incurred to make taxi ready for use is summed up to get the total cost of the taxi;

Cost of taxi = 36,000

Sales tax & fees = 1,200

Total cost = 36,000+1,200 = 37,200

a.) Find depreciation per year = (Total cost - Salvage) / useful life

Depreciation = (37,200 - 4,000) / 5 = $6,640

Therefore,

Depreciation expense 2016 = $6,640

Depreciation expense 2017 = $6,640

b.) Journal entry for 2016;

Account Debit Credit

Depreciation expense 6,640

Accumulated depreciation 6,640

c.) Book value on 1/1/2018 = Total cost - accumulated depreciation

Book value (1/1/2018) = 37200 - (6,640*2)

=37200 - (13,280) = 23,920

Journal entry for 2018;

Account Debit Credit

Cash 22,000

Accumulated depreciation 13,280

Loss on sale 1,920

Taxi 37,200