Swann Company sold a delivery truck on April 1, 2019. Swann had acquired the truck on January 1, 2015, for $40,500. At acquisition, Swann had estimated that the truck would have an estimated life of 5 years and a residual value of $3,000. Swann uses the straight-line method of depreciation. At December 31, 2018, the truck had a book value of $10,500. Required: 1. Prepare any necessary journal entries to record the sale of the truck, assuming it sold for: a. $9,875 b. $7,275 2. How should the gain or loss on disposal be reported on the income statement? 3. Assume that Swann uses IFRS and sold the truck for $9,875. In addition, Swann had previously recorded a revaluation surplus related to this machine of $5,000. What journal entries are required to record the sale?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
| 1. | Prepare any necessary
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| 2. | How should the gain or loss on disposal be reported on the income statement? | ||||
| 3. | Assume that Swann uses IFRS and sold the truck for $9,875. In addition, Swann had previously recorded a revaluation surplus related to this machine of $5,000. What journal entries are required to record the sale? |
Working notes:
Computation of Depreciation:
Cost of asset: $40,500
Life of asset: 5 years
Residual Value: $3000
Depreciation:
[$40,500 - $3000]/5 years
7500 Per annum
Depreciation for 3 months from Jan to March
7500 x 3/12 = $1875
Depreciation for 4 years
7500 x 4 = 30000
Accumulated Depreciation
$30000+$1875 = $31,875
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