Question

Brown Inc. acquired a delivery van on October 1, 2017 at a cost of $45,000. The useful life of the van was 12 years with a residual value of $3,000. Assume that the company used straight-line method with fractional years rounded to the nearest whole month. The delivery van was traded-in with a new one as of end of the year of 2018 (December 31, 2018). The list price of the new delivery van was $56,000. The Brown Inc. accepted a trade-in allowance of $40,850 and paid the remaining amount in cash to get the new van. In recording the trade-in, which of the following is correct?(3 Points)

Accumulated depreciation of the old van is debited by $3,375

Accumulated depreciation of the old van is debited by $4,375

Accumulated depreciation of the old van is credited by $4,375

Accumulated depreciation of the old van is credited by $3,375

Answer 1

Accumulated depreciation of the old van is debited by $4,375

Calculations:

Depreciation (as per SLM) = (Cost - salvage value) / Number of years

A	Cost	$ 45,000
B	Residual / Salvage Value	$   3,000
C	Number of years	12
(A-B)/C	Depreciation (SLM)	$   3,500

Now,

Year	Value at the beginning	Depreciation every year	Accumulated depreciation	Value at the end
2017	$                         45,000	$                                 875	$                                      875	$              44,125
2018	$                         44,125	$                              3,500	$                                   4,375	$              40,625

Accumulated depreciation is $ 4,375. I will be debited when recording the trade-in, as it needs to be reversed.

Clearly, option b is correct and other options are incorrect.