Question

The following transactions and adjusting entries were completed by a paper-packaging company called Gravure Graphics International during 2018 and 2019. The company uses straight-line depreciation for trucks and other vehicles, double-declining-balance depreciation for buildings, and straight-line amortization for patents.

2018
January		2		Paid $91,000 cash to purchase storage shed components.
January		3		Paid $2,000 cash to have the storage shed erected. The storage shed has an estimated life of 10 years and a residual value of $5,000.
April		1		Paid $34,000 cash to purchase a pickup truck for use in the business. The truck has an estimated useful life of five years and a residual value of $3,000.
May		13		Paid $600 cash for minor repairs to the pickup truck's upholstery.
July		1		Paid $24,000 cash to purchase patent rights on a new paper bag manufacturing process. The patent is estimated to have a remaining useful life of five years.
December		31		Recorded depreciation and amortization on the pickup truck, storage shed, and patent.
2019
June		30		Sold the pickup truck for $29,000 cash. (Record the depreciation on the truck prior to recording its disposal.)
December		31		Recorded depreciation on the storage shed. Also determined that the patent was impaired and wrote off its remaining book value (i.e., wrote down the book value to zero).

Required:

Prepare the journal entries required on each of the above dates

Answer 1

Journal Entries:-

Date	Particulars	Amount($)	Amount($)
2018
January 2	Storage Shed A/c Dr.      To Cash A/c (Being storage shed components purchased)	91000	91000
January 3	Storage Shed A/c Dr.      To Cash A/c (Being storage shed erected) Erection cost on storage shed is treated as capital expenditure, hence debited to the cost of the asset.	2000	2000
April 1	Truck A/c/Vehicle A/c   Dr.      To Cash A/c (Being the pick up truck purchased)	34000	34000
May 13	Repairs A/c    Dr.       To Cash A/c (Being minor expenses incurred) The expenses are minor in nature i.e. revenue in nature hence not debited to asset costs	3000	3000
July 1	Patent A/c (Intangible Assets A/c) Dr.       To Cash A/c (Being patent right purchased)	24000	24000
December 31	Depreciation A/c   Dr.        To Storage Shed A/c        To Truck A/c        To Patent A/c (Beingg depreciation charged)-----Note 1	29600	18600 6200 4800
June 30	Depreciation A/c Dr.      To Truck A/c (Being Depreciation charged for half year)--- Note 2	3100	3100
June 30	Cash A/c Dr.      To Truck A/c      To Gain on Sale(Profit & Loss A/c)---bal fig (Being sale recorded)	29000	24700 4300
December 31	Depreciation A/c Dr.       To Storage Shed A/c (Being depreciation recorded)---- Note 3	14880	14880
December 31	Impairement A/c Dr.       To Patent A/c (being patent impaired)---- Note 4	19200	19200

Note 1:- Depreciation Calculation:-

(a) On Storage Shed:-(Double Declining Method):-

Depreciation = 2 * Straight Line depreciation percentage * Book value of Asset at end of year

                     = 2 * 10% *$93000

                     = $18600

Straight Line Depreciation Value      = Book Value of Asset - salvage Value / Useful Life of Asset

   = $93000-$5000/10years

                                                             =$8800

Straight Line Depreciation Rate           = $8800/$93000-$5000 *100

                                                            =10%

(b) On Pickup Truck:-(Straight Line Method):-

Straight Line Depreciation                    = Book Value of Asset - salvage Value / Useful Life of Asset

   = $34000-$3000/5years

                                                             =$6200p.a.

Amortization on Patents (Straight Line Method):-

Amortization Expenses = Book Value of Intangible Asset / Useful Life in Years

                                     =$24000/5years

                                     = $4800

Note 2:- Depreciation on Truck (Before Sale) from 01.01.2019 till 30.06.2019:-

Straight Line Depreciation                    = Book Value of Asset - salvage Value / Useful Life of Asset

   = $34000-$3000/5years

                                                             =$6200/12 * 6months

                                                             = $3100

Balancing value of Truck as on 30.06.2019:- $34000-$6200-$3100

                                                                           $24700

Note 3:- Depreciation on Storage Shed as on 31.12.2019

(Double Declining Method):-

Depreciation = 2 * Straight Line depreciation percentage * Book value of Asset at end of year

                     = 2 * 10% *$93000-$18600

                     = $14880

Note 4:- Book Value of Patent as on 31.12.2019:- $24000-$4800 = $19200, which has been imapired completely.