City Taxi Service purchased a new auto to use as a taxi on January 1, 2018, for $36,000. In addition, City paid sales tax and title fees of $1,200 for the vehicle. The taxi is expected to have a five-year life and a salvage value of $4,000. Using the straight-line method, compute the depreciation expense for 2018 and 2019. Assume the van was sold on January 1, 2020, for $21,000. 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.) a. 2018 Depreciation $6,640 per year2019 Depreciation $6,640 per yearb. Loss on sale $23,720

Depreciation expense for 2018 and 2019 is $6,640 for each year

The amount of gain or loss that would be recognized on the asset disposal is - $2,920 (a loss)

Explanation:

Depreciation is the systematic recognition of the cost of an asset in the p/l overtime as a result of use. When accumulated, it is known as accumulated depreciation which is deducted from the cost of the asset to get the net book value or carrying amount of the asset. The cost of the asset includes all necessary cost incurred to make the asset available for use.

The cost less the salvage value divided by the estimated useful life gives the annual depreciation.

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

= $37,200

Annual depreciation

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

=$6,640

Net book value on 1 January 2020

= $37,200 - 2 ($6,640)

= $23,920

Gain / (loss) on disposal

=$21,000 - $23,920

= - $2,920