Question

You bought a van two years ago for £10,000. You depreciate vans over four years on a straight-line basis. On selling the van today, you made a gain on sale of £4,000. How much cash did you receive on selling the van Select one: a. £14,000 b. £4,000 O c. £9,000 d. £5,000

Answer 1

Solution:

As per the information given in the question we have

Purchase cost of the Van = £ 10,000

The van was purchased two years ago and is being sold today. Hence the Van has been depreciated for 2 years.

The company depreciates Vans over four years on a straight line basis i.e., useful life = 4 years.

Thus the Annual depreciation expense of the Van = Purchase cost / Useful life

= £ 10,000 / 4

= £ 2,500

Thus Depreciation expense for two years = £ 2,500 * 2

= £ 5,000

Therefore book value at the end of two years = Purchase cost - Depreciation expense for two years

= £ 10,000 - £ 5,000

= £ 5,000

We know that the gain on sale of Van = £ 4,000

The gain on sale of Van can be calculated as follows:

Gain on sale of Van =Sale Value of van – Book value of Van

Applying the available information in the formula we have

£ 4,000 = Sale Value of van - £ 5,000

£ 4,000 + £ 5,000 = Sale Value of van

Sale Value of van = £ 4,000 + £ 5,000

Sale Value of van = £ 9,000

Thus cash received on sale of Van = £ 9,000

The solution is Option c. £ 9,000