Question

On January 1, 2023, Estrada Inc buys 20 motorcycles at a CHP auction for $10,000 each. Estrada capitalizes the motorcycles in the "Vehicle" account on their balance sheet. They expect to use the motorcycles in operations for four years, at which time they will sell them for scrap for $400 each. For depreciation calculation purposes, each motorcycle has salvage value of $400. On January 1, 2026, Estrada sells one of the motorcycles (Motorcycle #1) for $2,000 cash. Does Estrada have a gain or loss? enter gain or loss What is the amount of the gain or loss?

Answer 1

Estrada Inc has a loss of -$182,000 when they sell Motorcycle #1 for $2,000.

Step-by-step explanation:

For depreciation calculation purposes, the salvage value of each motorcycle is $400. So, the depreciable cost of each motorcycle is $10,000 - $400 = $9,600. The total depreciable cost for the 20 motorcycles is $9,600 x 20 = $192,000. Estrada expects to use the motorcycles for four years, so the annual depreciation expense is $192,000 / 4 = $48,000.

On January 1, 2026, when Estrada sells Motorcycle #1 for $2,000 cash, the carrying value of the motorcycle on the books is its original cost minus accumulated depreciation. The accumulated depreciation for four years is $48,000 x 4 = $192,000. Therefore, the carrying value of Motorcycle #1 is $10,000 - $192,000 = -$182,000 (a loss). Estrada has a loss of -$182,000 when they sell Motorcycle #1 for $2,000.