Chapter 7, Problem 7.1APCP

1.

To determine

The amount to be recorded for the new vehicle.

Explanation of Solution

Intangible Assets:

These are the long-term assets having no physical existence. However, the benefits provided by these assets are used by the company for a long period of time. Example: Patent, Trademark, Goodwill, Copyrights.

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
Total	$17,000

Table (1)

2.

To determine

To indicate:  Whether the amount not included in the equipment account should be recorded.

Explanation of Solution

The amount to be included in the Equipment account is as follows:

An annual insurance amounting to $1,800 that incurred over the period from the July 1, 2016 to June 30, 2017.

3.

To determine

To prepare: A depreciation schedule using the straight-line method.

Answer to Problem 7.1APCP

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

GA
Year	Allocation Base (1)	Depreciation rate	Depreciation expense	Accumulated depreciation	Book Value
1	12,500	$0.20\times \frac{1}{2}$	1,250	1,250	15,750
2	12,500	0.20	2,500	3,750	13,250
3	12,500	0.20	2,500	6,250	10,750
4	12,500	0.20	2,500	8,750	8,250
5	12,500	0.20	2,500	11,250	5,750
6	12,500	$0.20\times \frac{1}{2}$	1,250	12,500	4,500
	Total		12,500

Explanation of Solution

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.

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)

• $\text{Depreciation expense }=\text{ Allocation}\text{base }\times \text{ Depreciation rate}$
• In the year 1, the period is July 1, 2016 to June 30, 2017. Therefore, depreciation expense in the year 2016 is only six months and the calculation of depreciation is as follows:

$\$2,500\times \frac{6}{12}=\$1,250$

• Book value = $17,000–Accumulated depreciation

4.

To determine

To record: The sale of the vehicle after two years for $10,000 later on July 1, 2018.

Answer to Problem 7.1APCP

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		10,000
	Accumulated depreciation  (2)		5,000
	Loss (3)		2,000
	Equipment			17,000
	(To record the sale of equipment for loss.)

Explanation of Solution

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

Working note

$\begin{array}{c}\text{Accumulated depreciation }=\left(\begin{array}{l}\left[\text{Depreciation }\left(\text{July 2016 }-\text{ December 2016}\right)\right]\\ +\left[\text{Depreciation }\left(\text{January 2016 }-\text{ December 2017}\right)\right]\\ +\left[\text{Depreciation }\left(\text{January 2017 }-\text{ July 2018}\right)\right]\end{array}\right)\\ =\$1,250+\$2,500+\$1,250\\ =\$5,000\end{array}$ (2)

Determine the gain / loss on sale of equipment.

$\begin{array}{c}\text{Loss }=\text{ Purchase price }-\text{ Cash }-\text{ Accumulated depreciation}\\ =\$17,000-\$10,000-\$5,000\\ \text{Loss }=\$\left(2,000\right)\end{array}$ (3)