Accounting Online Program Certification Practice Test

What is the profit or loss on disposal of the old motor vehicle owned by Bailey Ltd?

1. £6,750 profit

2. £12,000 profit

3. £6,750 loss

4. £3,500 loss

The correct answer is: £6,750 loss

To determine the profit or loss on the disposal of the old motor vehicle, you first need to understand the key elements involved in this calculation: the book value of the asset at the time of sale and the sale proceeds received. The book value is the original cost of the motor vehicle minus any accumulated depreciation that has been recorded against it. If the amount received from the sale of the motor vehicle is less than its book value, this results in a loss. Conversely, if the sale proceeds exceed the book value, it results in a profit. In this scenario, choosing the option indicating a £6,750 loss implies that the proceeds from the sale of the motor vehicle are £6,750 less than its recorded book value. This loss is significant as it reflects the wear and tear, or depreciation, that the asset has undergone during its useful life, alongside market conditions influencing the sale price at the time of disposal. Ultimately, the answer of a £6,750 loss reveals an essential accounting concept where the loss on disposal demonstrates the difference between an asset's carrying amount and its realizable value. This helps stakeholders understand the financial impact of asset management decisions within the company, as well as how efficiently assets are being utilized. Such calculations are critical for accurate