Question

On January 2, 2016, Flake Company purchased a truck for $140,000 cash. That truck has an estimated useful life of seven years and an estimated salvage value of $12,000. The straight-line method of depreciation is being used.

Required: 

A.  Prepare a schedule showing the calculation of the book value of the truck on December 31, 2019. 

B.  Assume the truck is to be disposed of on May 1, 2020. Prepare the journal entry to record the depreciation for the four months ended April 30, 2020. 

C. Assuming that the depreciation for 2020 has been brought up to date as in Part B above, prepare the journal entries to record the disposal of the truck on May 1, 2020, under each of the following unrelated assumptions: 

1.	The truck was sold for $42,000 cash.
2.	The truck was sold for $92,000 cash.
3.	The truck was retired from service, and it is expected $39,000 will be received from the sale of the salvaged materials.
4.	The truck and $110,000 cash were exchanged for office equipment that had a cash price of $200,000. The exchange had commercial substance.
5.	The truck and $130,000 cash were exchanged for a new truck that had a cash price of $215,000. The exchange has no commercial substance.
6.	The truck was completely destroyed in an accident. Cash of $49,000 is expected to be received from the insurance company.

Answer 1

1. Purchase Value of Truck = $ 140,000

Salvage Value = $ 12,000

Useful Life = 7 years

Depreciable Value = Purchase Value - Salvage Value = $ 128,000

Depreciation Method = S.L.M

Therefore Annual Depreciation rate = 1/useful life = 1/7 = 14.29% to be applied on Depreciable Value.

Purchase Date = Jan 2, 2016

A.)      For Flakes Company :

Particulars Amount in $

Purchase Value on Jan 2, 2016 $ 140,000

Less : Depreciation @ 14.29% p.a. for 2016,2017,2018 & 2019 on Depreciable Value ($ 73,165)

Net Book Value on Dec 31, 2019, $ 66,835

B.)    Journal Entry for 4 months depreciation :

Notes :

Depreciation for 4 months = Depreciable Value X Depreciation Rate X 4/12 = $ 6,097

Journal Entry :

a. Depreciation on Truck A/c ………………. Dr. $ 6,097

          To Accumulated Depreciation A/c Cr.              $ 6,097

(Being truck depreciated for 4 months ended Apr 30, 2020)

b. Accumulated Depreciation A/c ………...Dr. $ 79,262

          To Truck Disposal A/c Cr.                                       $ 79,262

(Being Accumulated Depreciation till Apr 30, 2019, transferred to Truck Disposal A/c)

c. Truck Disposal A/c …………………….Dr. $ 140,000

              To Truck A/c Cr.                                                $ 140,000

(Being truck transferred to disposal A/c)

C.) Journal for Truck Disposal

1. Sold for $ 42,000

            Cash A/c ………………………. Dr. $ 42,000

             Loss on Sale of Truck A/c …....Dr. $ 18,738

                        To, Truck Disposal A/c               $ 60,738

(Being Truck disposed of)

2. Sold for $ 92,000

            Cash A/c ………………………… Dr. $ 92,000

                     To, Truck Disposal A/c                              $92,000

(Being Truck Disposed Off)

             Truck Disposal A/c   ……………..Dr. $ 31,262

                              To Profit on sale of Truck A/c             $ 31,262

(Being Profit on sale of truck recognized)

3. Retired

              Salvage Materials A/c...………. Dr. $ 39,000

               Loss on Sale of Truck A/c …....Dr. $ 21,738

                        To, Truck Disposal A/c                         $ 60,738

(Being Truck retired with a salvage value of $ 39,000)

4. Exchange for Office Equipment

Office Equipment A/c ………………… Dr. $ 200,000

               To Cash A/c                                                $ 110,000

               To Truck Disposal A/c                                $   60,738

                To Profit on Exchange of Assets                $   29,262

(Being Truck exchanged with office equipment)

5. Exchange for Truck

Truck (New) A/c ………………… Dr. $ 190,738

               To Cash A/c                                                $ 130,000

               To Truck Disposal A/c                                $   60,738

(Being old truck exchanged with new truck)

Note: Profit on exchanging similar assets ($ 24,262) is not recognized to Income A/c but reduce the Initial Recognized Value of new assets.

6. Loss of Truck in Accident

          Insurance Claim Receivable A/c ………… Dr. $ 49,000

          Loss on Destruction of Asset A/c...……….Dr. $ 11,738

                             To Truck Disposal A/c                                  $ 60,738

(Being insurance receivable recognized on the destroyed truck)