City Taxi Service purchased a new auto to use as a taxi on January 1, Year 1, for $21,700. In addition, City paid sales tax and title fees of $730 for the vehicle. The taxi is expected to have a five-year life and a salvage value of $6,390.

Required a. Using the straight-line method, compute the depreciation expense for Year 1 and Year 2.

b & c. Assume that the taxi was sold on January 1, Year 3, for $18,416. Prepare the general journal entries to record the Year 1 depreciation and sale of the taxi in Year 3.