# Montezuma Inc. purchases a delivery truck for $20,000. The truck has a salvage value of$8,000 and is expected to be driven for ten years. Montezuma uses the straight-line depreciation method. Calculate the annual depreciation expense. After five years of recording depreciation, Montezuma determines that the delivery truck will be useful for another five years (ten years in total, as originally expected) and that the salvage value will increase to $10,000. Determine the depreciation expense for the final five years of the asset’s life, and create the journal entry for years 6â€“10 (the entry will be the same for each of the five years). FindFindarrow_forward ### Principles of Accounting Volume 1 19th Edition OpenStax Publisher: OpenStax College ISBN: 9781947172685 #### Solutions Chapter Section FindFindarrow_forward ### Principles of Accounting Volume 1 19th Edition OpenStax Publisher: OpenStax College ISBN: 9781947172685 Chapter 11, Problem 13PB Textbook Problem 1 views ## Montezuma Inc. purchases a delivery truck for$20,000. The truck has a salvage value of $8,000 and is expected to be driven for ten years. Montezuma uses the straight-line depreciation method. Calculate the annual depreciation expense. After five years of recording depreciation, Montezuma determines that the delivery truck will be useful for another five years (ten years in total, as originally expected) and that the salvage value will increase to$10,000. Determine the depreciation expense for the final five years of the asset’s life, and create the journal entry for years 6â€“10 (the entry will be the same for each of the five years).

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:

The depreciation expense before and after the revision of the salvage value of asset. Also prepare journal entry for sixth to tenth years.

### 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 $20,000 for the cost of asset,$8,000 for salvage value, and 10 Years for the economic life of the asset, in the above formula.

Depreciation Expense=$20,000$8,00010=$12,00010=$1,200

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

 Particulars Amount ($) Original cost 20,000 Less: Depreciation charged earlier ($1,200×5) 6,000 Book value in the beginning of Year 6 14,000 New salvage value 10,000 Balance economic life (Years) 5 Revised depreciation expense ($14,000−$10,0005) 800

Table (1)

Record depreciation expense for Year 6th:

 Date Account Debit ($) Credit ($) Year 6 Depreciation Expense-Delivery Truck 800 Accumulated Depreciation- Delivery Truck 800 (To record depreciation expense.)

Table (2)

• Depreciation is an expense and it is increased by $800. Therefore, Depreciation Expense-Delivery Truck is debited with$800.
• Accumulated Depreciation-Delivery Truck is a contra asset and it is increased by $800. Therefore, Accumulated Depreciation-Delivery Truck is credited with$800.

Record depreciation expense for Year 7th:

 Date Account Debit ($) Credit ($) Year 7 Depreciation Expense-Delivery Truck 800 Accumulated Depreciation- Delivery Truck 800 (To record depreciation expense

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