Chapter 7, Problem 1AP

1.

To determine

Record the expenditures related to the new vehicle.

Explanation of Solution

Fixed Assets: It refers to the long-term assets having a useful life of more than a year which is, acquired by a company to be used in its business activities, for generating revenue. Examples of fixed assets are Plant, Property, Equipment (Vehicle), Land, and Buildings.

Record the expenditures related to the new vehicle (equipment).

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2022
July 01	Equipment (Refer Table (2))		17,000
	Prepaid insurance		1,800
	Cash			18,800
	(To record the purchase of vehicle and the payment of insurance premium.)

Table (1)

To record the purchase of vehicle and the payment of prepaid insurance:

• Equipment is an asset account and it increases due to the purchase of new vehicle. Thus, it is debited with $17,000.
• Prepaid insurance is an asset and it increases by $1,800. Thus, it is debited with $1,800.
• Cash is an asset account. Purchase of equipment and payment of prepaid insurance decreases the cash by $18,800. Thus, it is credited.

Determine the amount to be recorded for the new vehicle.

Particulars	Amount ($)
Purchase price	$12,000
Painting and new logo	$3,000
Deluxe roof and trailer hitch	$2,000
TotalTotal cost of the vehicle	$17,000

Table (2)

2.

To determine

Record the expenditure related to vehicle maintenance on October 22, 2022.

Explanation of Solution

Fixed Assets: It refers to the long-term assets having a useful life of more than a year which is, acquired by a company to be used in its business activities, for generating revenue. Examples of fixed assets are Plant, Property, Equipment (Vehicle), Land, and Buildings.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2022
October 22	Repairs and maintenance		400
	Cash			400
	(To record the payment of repairs and maintenance expense.)

Table (3)

To record the payment of repairs and maintenance expense:

• Repairs and maintenance is an expense (decreases the stockholders’ equity) and it increases by $400. Thus, it is debited with $400.
• Cash is an asset account. Payment of repairs and maintenance expense decreases the cash by $400. Thus, it is credited.

3.

To determine

Prepare a depreciation schedule using the straight-line method.

Answer to Problem 1AP

A depreciation schedule using the straight-line method is prepared as follows:

GA
Depreciation Schedule under Straight line method
Year	Allocation Base (1)	Depreciation rate	Depreciation expense	Accumulated depreciation	Book Value
(1)	(2)	(3)	(4) = $\left(2\right)\times \left(3\right)$	(5)	(6) = $\text{\$17,000}-\left(4\right)$
2022	$12,500	$0.20\times \frac{1}{2}$(2)	$1,250 (2)	$1,250	$15,750
2023	$12,500	0.20	$2,500	$3,750	$13,250
2024	$12,500	0.20	$2,500	$6,250	$10,750
2025	$12,500	0.20	$2,500	$8,750	$8,250
2026	$12,500	0.20	$2,500	$11,250	$5,750
2027	$12,500	$0.20\times \frac{1}{2}$(2)	$1,250 (2)	$12,500	$4,500
Total			$12,500

Table (4)

Explanation of Solution

Depreciation: Depreciation refers to the reduction in the monetary value of a fixed asset due to its use, wear and tear or obsolescence. In other words, it is a method of distributing the cost of the fixed assets over its estimated useful life.

Straight-line method: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset.

$\text{Depreciation expense}=\frac{\text{Cost of the asset}-\text{Residual value}}{\text{Estimated useful life}}$

Working Note:

Determine the amount of allocation base:

$\begin{array}{c}\text{Allocation base }=\text{Orginal cost}-\text{Residual value}\\ =\$17,000-\$4,500\\ =\$12,500\end{array}$

(1)

In the year 1, the period is July 1, 2022 to December 31, 2022. Therefore, depreciation expense in the year 2022 is only six months and similarly, the depreciation for the final year is from January 1, 2027 to June 30, 2027. Hence, the calculation of depreciation for December 31, 2022 and for June 30, 2027 is as follows:

$\begin{array}{c}\text{Depreciation expense}=\text{Allocation base}\times \frac{\text{Number of months}}{\text{Months in a year}}\\ =\$2,500\left(1\right)\times \frac{6}{12}\\ =\$1,250\end{array}$

(2)

4.

To determine

Record the depreciation expense and other adjustments related to vehicle on December 31, 2022.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Record the depreciation expense and other adjustments related to vehicle on December 31, 2022.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2022
December 31	Depreciation expense – Equipment (2)		1,250
	Accumulated depreciation -Equipment			1,250
	(To record the depreciation expense)
December 31	Insurance expense (3)		900
	Prepaid insurance			900
	(To record the expired prepaid insurance)

Table (5)

To record the depreciation expense:

• Depreciation expense is an expense (decreases the stockholders’ equity) and it increases by $1,250. Therefore, debit depreciation account with $1,250.
• Accumulated depreciation is a contra-asset. Increase in the accumulated depreciation account decreases the related asset account. Therefore, credit accumulated depreciation account with $1,250.

To record the expired prepaid insurance:

• Insurance expense is an expense is an expense (decreases the stockholders’ equity) and it increases by $900. Therefore, debit insurance expense account with $900.
• Prepaid insurance is an asset. It decreases the value of asset. Therefore, credit prepaid insurance account with $900.

Working notes:

Determine the prepaid insurance for the year ended December 31, 2022.

$\begin{array}{c}\text{Insurance expense}=\text{Policy amount}\times \frac{\text{Number of months}}{\text{Months in a year}}\\ =\$1,800\times \frac{6\text{ months }\left(\text{July to December}\right)}{12\text{ months}}\\ =\$900\end{array}$

(3)

5.

To determine

Record the sale of the vehicle two years later on July 1, 2024, for $10,000.

Explanation of Solution

Fixed Assets: It refers to the long-term assets having a useful life of more than a year which is, acquired by a company to be used in its business activities, for generating revenue. Examples of fixed assets are Plant, Property, Equipment (Vehicle), Land, and Buildings.

Record the sale of the vehicle two years later on July 1, 2024, for $10,000.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2024
July 01	Cash		10,000
	Accumulated depreciation  (4)		5,000
	Loss on sale (5)		2,000
	Equipment			17,000
	(To record the sale of equipment for loss.)

Table (6)

To record the sale of equipment for loss:

• Cash is an asset and it increases the cash balance due to sale of the asset. Therefore debit cash account with $10,000.
• Accumulated depreciation is a contra-asset. Increase in the accumulated depreciation account decreases the related asset account. Therefore, debit accumulated depreciation account with $5,000.
• Loss on sale of equipment decreases the value of stockholders’ equity. Therefore, Loss on sale is debited with $2,000.
• Equipment is an asset. Sale of asset decreases the asset account. Therefore, credit equipment account with $17,000

Working notes:

Determine the accumulated depreciation.

$\begin{array}{c}\text{Accumulated depreciation }=\left(\begin{array}{l}\left[\text{Depreciation }\left(\text{July 2022 }-\text{ December 2022}\right)\right]\\ +\left[\text{Depreciation }\left(\text{January 2023 }-\text{ December 2023}\right)\right]\\ +\left[\text{Depreciation }\left(\text{January 2024 }-\text{ July 2024}\right)\right]\end{array}\right)\\ =\left(\$2,500\times 1/2\right)+\$2,500+\left(\$2,500\times 1/2\right)\\ =\$1,250+\$2,500+\$1,250\\ =\$5,000\end{array}$

(4)

Determine the gain / loss on sale of equipment.

$\begin{array}{c}\text{Loss on sale}=\text{ Cost of the asset }-\text{ Cash }-\text{ Accumulated depreciation}\\ =\$17,000\text{ (Refer Table (2))}-\$10,000-\$5,000\left(4\right)\\ \text{Loss on sale}=\left(\$2,000\right)\end{array}$

(5)