Question

Tony and Suzie see the need for a rugged all-terrain vehicle to transport participants and supplies. They decide to purchase a used Suburban. The cost of the Suburban is $8,800. The vehicle is purchased in late June and will be put into use on July 1, 2019. Annual insurance from GEICO runs $1,400 per year. The paint is starting to fade, so they spend an extra $2,200 to repaint the vehicle, placing the Great Adventures logo on the front hood, back, and both sides. An additional $1,200 is spent on a deluxe roof rack and a trailer hitch. The painting, roof rack, and hitch are all expected to increase the future benefits of the vehicle for Great Adventures. They expect to use the Suburban for five years and then sell the vehicle for $3,700.

1. Determine the amount that should be recorded for the new vehicle.

2. Prepare a depreciation schedule using the straight-line method.

3. Record the sale of the vehicle two years later on July 1, 2021, for $7,600. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

  Record the sale of equipment.

Answer 1

1	Determine the amount that should be recorded for the new vehicle.
	Purchase Price		$8,800
	Add : Painting and new logo		$2,200
	Add : Deluxe roof rack and trailer hitch		$1,200
	Total		$12,200
	Since painting, roof rack and hitch are all expected to increase the future benefits of the vehicle they are capitalised and not expensed in the profit or loss statement
	The annual insurance is expensed as it is incurred over the period from July 1 , 2019 to June 30, 2020
2	Prepare a depreciation schedule using the straight-line method.
	Year	Allocation Base for Depreciation	Depreciation Rate	Depreciation Expense	Accumulated Depreciation	Book Value
	1	$8,500	10%	$850	$850	$11,350
	2	$8,500	20%	$1,700	$2,550	$9,650
	3	$8,500	20%	$1,700	$4,250	$7,950
	4	$8,500	20%	$1,700	$5,950	$6,250
	5	$8,500	20%	$1,700	$7,650	$4,550
	6	$8,500	10%	$850	$8,500	$3,700
	Total
	Allocation Base for Depreciation = 12200-3700		8500
	Depreciation Amount		1700	8500/5
	Depreciation Rate = 1700/8500		20.00%
	The depreciation is first year would be for 6 months since vehicle is put to use from 01st July 2019 and hence depreciation rate would be 10%
	Book Value = Cost of Vehicle - Accumulated Depreciation
	Since the vehicle would be sold on 30th june 2024, the depreciation applicable would be for half year and hence depreciation rate would be 10%
3	Record the sale of the vehicle two years later on July 1, 2021, for $7,600.
	Date	Transaction	Debit	Credit
	1-Jul-21	Cash	$7,600
		Accumulated Depreciation	$3,400
		Loss on Sale of Vehicle	$1,200
		To Equipment		$12,200
		(Being loss on sale)
		Accumulated Depreciation = 8500*20%*2		3400
		Loss on Sale of Equipment = (12200-3400-7600)		1200