Question

If a company sells one of its trucks for consideration (cash and receivables) that is less than the book value of the truck (updated through the date of the sale), which of the following is true?

1) The company will recognize a gain on the sale
2) The company will recognize a loss on the sale
3) The company will not recognize any gain or loss on the sale
4) The company will only recognize a gain if the sale is for cash

Answer 1

If a company sells a truck for less than its book value, the company will recognize a loss on the sale.

Step-by-step explanation:

If a company sells one of its trucks for consideration (cash and receivables) that is less than the book value of the truck (updated through the date of the sale), the company will recognize a loss on the sale. This is because the book value represents the net amount at which the truck is recorded on the company's balance sheet, and selling the truck below this value results in a decrease in the company's overall assets, leading to a loss.

The recognition of a gain or loss on the sale of an asset is determined by comparing the selling price (consideration) with the book value. If the selling price exceeds the book value, a gain is recognized. If the selling price is less than the book value, a loss is recognized.

It is important to note that the form of consideration (cash, receivables, etc.) does not affect the recognition of a gain or loss. Whether the sale is for cash or other assets, the gain or loss is determined based on the selling price and the book value.