BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

Solutions

Chapter
Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Transactions for fixed assets, including sale

The following transactions and adjusting entries were completed by Legacy Furniture Co. during a three-year period. All are related to the use of delivery equipment. The double- declining-balance method of depreciation is used.

Year 1  
Jan. 4. Purchased a used delivery truck for $28,000, paying cash.
Nov. 2. Paid garage $675 for miscellaneous repairs to the truck.
Dec. 31  Recorded depreciation on the truck for the year. The estimated useful life of the truck is four years, with a residual value of $5,000 for the truck.
Year 2  
Jan. 6. Purchased a new truck for $48,000, paying cash.
Apr. 1. Sold the used truck purchased on Jan. 4 of Year 1 for $15,000. (Record depreciation to date in Year 2 for the truck.)
June 11. Paid garage $450 for miscellaneous repairs to the truck.
Dec. 31. Record depreciation for the new truck. It has an estimated residual value of $9,000 and an estimated life of five years.
Year 3  
July 1. Purchased a new truck for $54,000, paying cash.
Oct. 2. Sold the truck purchased January 6, Year 2, for $16,750. (Record depreciation to date for Year 3 for the truck.)
Dec. 31. Recorded depreciation on the remaining truck purchased on July 1. It has an estimated residual value of $12,000 and an estimated useful life of eight years.

Instructions

Journalize the transactions and the adjusting entries.

To determine

Disposal of Assets: Disposal is an activity of selling the worn-out assets that is no longer in need for the business, in return of some consideration. Disposal may be made in any of the following situations:

  • Disposal with no gain no loss: When the asset is disposed with no consideration received.
  • Disposal with gain: When the asset is disposed for more than its book value (original cost less accumulated depreciation).
  • Disposal with loss: When the asset is disposed for less than its book value.

Double-declining-balance method: It is an accelerated method of depreciation under which the depreciation declines in each successive year until the value of asset becomes zero. Under this method, the book value (original cost less accumulated depreciation) of the long-term asset is decreased by a fixed rate. It is double the rate of the straight-line depreciation. Use the following formula to determine the annual depreciation:

Depreciation = Purchase price × (2Useful life)

To journalize: the transactions and adjusting entries for Year 1.

Explanation

Journalize the transactions and adjusting entries for Year 1.

Date Account Title and Explanation Post Ref

Debit

($)

Credit ($)
Year 1
January 4 Delivery Truck 28,000
   Cash 28,000
(To record the purchase of a used delivery truck.)
November 2 Truck Repair Expense 675
   Cash 675
(To record the truck repair expense incurred.)
December 31 Depreciation Expense-Delivery Truck 14,000 (1)
     Accumulated depreciation-Delivery Truck 14,000
(To record the depreciation expense for the used delivery truck.)

Working note:

Determine the amount of depreciation expense of the used delivery truck for the year1.

Cost of the used delivery truck= $28,000

Estimated Useful Life =4 years

DepreciationExpense= Purchase price × (2Useful life)=$28,000×24=$14,000 (1)

Year 1

January 4: Record the purchase of an used delivery truck.

  • Delivery Truck is an asset, and it is increased by $28,000. Therefore, debit Delivery Truck account by $28,000.
  • Cash is an asset, and it is decreased by $28,000. Therefore, credit cash with $28,000.

November 2: Record the miscellaneous repairs expense incurred for delivery truck.

  • Truck Repairs Expense is an expense and a component of stockholders’ equity. It is increased by $675 which reduces the stockholders’ equity. Therefore, debit Truck Repairs Expense account by $675.
  • Cash is an asset, and it is decreased by $675. Therefore, credit cash with $675.

December 31: Record an adjusting entry for depreciation expense.

  • Depreciation expense-Delivery Truck is an expense and a component of stockholders’ equity. It is increased by $14,000 which reduces the stockholders’ equity. Therefore, debit Depreciation Expense-Delivery Truck account by $14,000.
  • Accumulated depreciation-Delivery Truck is a contra-asset with a normal credit balance. The increase in accumulated depreciation decreases the asset by $14,000. Therefore, credit Accumulated depreciation – Delivery Truck by $14,000.

Journalize the transactions and adjusting entries for Year 2.

Date Account Title and Explanation Post Ref

Debit

($)

Credit ($)
Year 2
January 6 Delivery Truck 48,000
   Cash 48,000
(To record the purchase of delivery truck.)
April 1 Depreciation Expense-Delivery Truck 1,750 (2)
      Accumulated depreciation-Delivery Truck 1,750
(To record the depreciation expense for the used delivery truck.)
April 1 Cash 15,750
Accumulated depreciation-Delivery Truck 15,000
      Gain on sale of Delivery Truck 2,750 (3)
Delivery Truck 28,000
(To record the sale of the used delivery truck.)
June 11 Truck Repair Expense 450
  Cash 450
(To record the truck repair expense incurred.)
December 31 Depreciation Expense-Delivery Truck 19,200 (4)
    Accumulated depreciation-Delivery Truck 19,200
(To record the depreciation expense for the new truck.)

Table (2)

Working note:

Calculate the Depreciation expense for the used delivery truck sold.

Cost of the used delivery truck =$28,000

Accumulated Depreciation =$14,000 (1)

Estimated Useful Life =4 years

Number of months used in Year 2 = 3months (January 1-March 31)

DepreciationExpense= [(CostAccumulatedDepreciation) × (2Useful life)×Numberofmonthsused12]=($28,000$14,000)×24×312=$14,000×24×312=$1,750 (2)

Calculate the gain or (loss) on the sale of the used delivery truck.

Cash received on sale =$15,000

Cost of the used delivery truck =$28,000

Accumulated Depreciation = $15,750($15,000+$1,750)

Gainor(loss)onsale = SalesProceedsBookValue= SalesProceeds(CostAccumulatedDepreciation)=$15,000($28,000$15,750)=$15,000$12,250=$2,750 (3)

Determine the amount of depreciation expense of the new delivery truck for the year2.

Cost of the new delivery truck= $48,000

Estimated Useful Life =5 years

DepreciationExpense= Purchase price × (2Useful life)=$48,000×25=$19,200 (4)

Year 2

January 6: Record the purchase of a new delivery truck.

  • Delivery Truck is an asset, and it is increased by $48,000. Therefore, debit Delivery Truck account by $48,000.
  • Cash is an asset, and it is decreased by $48,000. Therefore, credit cash with $48,000.

April 1: Record the depreciation expense for the used delivery truck.

  • Depreciation expense-Delivery Truck is an expense and a component of stockholders’ equity. It is increased by $1,750 which reduces the stockholders’ equity. Therefore, debit Depreciation Expense-Delivery Truck account by $1,750.
  • Accumulated depreciation-Delivery Truck is a contra-asset with a normal credit balance. The increase in accumulated depreciation decreases the asset by $1,750

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Why is the American economy called a mixed economy?

Foundations of Business (MindTap Course List)

Why must Work in Process Inventory be adjusted for factory overhead applied at year-end?

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)

Why might purchasing power parity fail to hold?

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)