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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Loban Company purchased four cars for $9,000 each and expects that they will be sold in 3 years for $1,500 each. The company uses group depreciation on a straight-line basis.

Required:

  1. 1. Prepare journal entries to record the acquisition and the first year’s depreciation expense.
  2. 2. If one of the cars is sold at the beginning of the second year for $7,000, what journal entry is required?

1.

To determine

Prepare necessary journal entries to record the acquisition and depreciation expense of first year for Company L.

Explanation

Depreciation: Depreciation is a method of reducing the capitalized cost of long-lived operating assets or plant assets for the period the asset is used.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

Prepare necessary journal entries to record the acquisition and depreciation expense of first year for Company L as follows:

Acquisition of car:

DateAccount Title & ExplanationDebit ($)Credit($)
Cars (1)36,000
    Cash 36,000
(To record the purchase of cars)

Table (1)

  • Cars are asset and it increases the value of assets by $36,000. Therefore, debit the cars account with $36,000.
  • Cash is an asset, and it decreases the value of assets by $36,000. Therefore, credit cash account with $36,000.

First year depreciation expense:

DateAccount Title & ExplanationDebit ($)Credit($)
 Depreciation expense (3)10,000 
     Accumulated depreciation-Cars 10,000
 (To record the depreciation expense incurred)

Table (2)

  • Depreciation expense is a component of stockholder’s equity. It decreases the value of stockholder’s equity by 10,000. Therefore, debit depreciation expense account with 10,000...

2.

To determine

Prepare journal entry to record the sale of car.

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