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Montezuma Inc. purchases a delivery truck for $15,000. The truck has a salvage value of $3,000 and is expected to be driven for eight years. Montezuma uses the straight-line depreciation method. Calculate the annual depreciation expense. After three years of recording depreciation, Montezuma determines that the delivery truck will only be useful for another three years and that the salvage value will increase to $4,000. Determine the depreciation expense for the final three years of the asset’s life, and create the journal entry for year four.

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 11, Problem 11PA
Textbook Problem
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Montezuma Inc. purchases a delivery truck for $15,000. The truck has a salvage value of $3,000 and is expected to be driven for eight years. Montezuma uses the straight-line depreciation method. Calculate the annual depreciation expense. After three years of recording depreciation, Montezuma determines that the delivery truck will only be useful for another three years and that the salvage value will increase to $4,000. Determine the depreciation expense for the final three years of the asset’s life, and create the journal entry for year four.

To determine

Introduction:

Depreciation is reduction in the value of fixed assets due to its regular use. Depreciation is charged to income statement as an expense.

To compute:

Thedepreciation expense before and after the revisionof the salavage value and economic life of the asset and to prepare journal entry for the fourth year.

Explanation of Solution

Computation of depreciation expense:

Depreciation expense can be computed by using the following formula,

Depreciation Expense=Cost of AssetSalvage ValueEconomic Life of the Asset

Substitute $15,000 for the cost of asset, $3,000 for salvage value, and 8 Years for the economic life of the asset in the above formula.

Depreciation Expense=$15,000$3,0008=$12,0008=$1,500

Computation of depreciation expense after revision to be charged in the final three years of the asset’s life:

Particulars Amount ($)
Original cost 15,000
Less: Depreciation charged earlier (

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Chapter 11 Solutions

Principles of Accounting Volume 1
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