Question

Joel Harvey Florists acquired a truck on January 1, 2007.  The company paid $11,000 for the truck, $500 for destination charges, and $250 to paint the company name on the side of the truck. The company’s accounting manager estimates the truck to have a five-year useful life and a residual value of $1,750. The truck is expected to be driven 100,000 miles in five years.  It is actually driven 15,000 miles in 2007, 25,000 miles in 2008, 30,000 miles in 2009, 25,000 miles in 2010, and 5,000 miles in 2011.

Part 1

On January 1, 2007, how much should Joel Harvey Florist capitalize for the cost of the truck? Write the journal entry.

Part 2

How much depreciation expenses that would be recorded for the years 2007 through 2011 using each of the following methods?

a.         Straight-line

b.         Unit-of-production

c.         Declining-balance

Part 3

On December 31, 2011, Joel Harvey sold the truck for $3,000 cash.  Compute the gain or loss on sale. Write the journal entry.

Answer 1

Part 1

Costs to capitalize for the truck

Particulars	Amount ($)
Truck Cost	11,000
Destination Charges	500
Charges to paint company name	250
Costs to Capitalize	11,750

Journal Entry:

Date	Account Title	Debit ($)	Credit ($)
01 January 2007	Truck	11,750
	Cash		11,750
	(To capitalize the cost of the truck)

Part 2

a. Straight Line Method

Particulars	Amount ($)
Cost of Truck	11,750
Less: Salvage Value	-1,750
Useful Life in years	5
Depreciation Expense per year (11,750 - 1,750)/5	2,000

b. Unit of production

Depreciation Expense = (Original Value less Salvage Value)/Estimated Miles Driven)* Miles actually driven per year

Particulars	Amount ($)
Cost of Truck	11,750
Less: Salvage Value	-1,750
Depreciable Amount	10,000
Estimated Miles Driven	1,00,000

Depreciation Expense	Amount ($)	Calculation
Year 2007	1,500	=(11,750-1,750)/100,000)*15,000
Year 2008	2,500	=(11,750-1,750)/100,000)*25,000
Year 2009	3,000	=(11,750-1,750)/100,000)*30,000
Year 2010	2,500	=(11,750-1,750)/100,000)*25,000
Year 2011	500	=(11,750-1,750)/100,000)*5,000

c. Declining Balance Method

Particulars	Amount ($)
Cost of Truck	11,750
Less: Salvage Value	-1,750
Depreciable Amount	10,000
Useful Life in years	5

Year	Depreciation Expense	Accumulated Depreciation	Closing Balance	Calculation
Beginning Balance	11,750	-	-
2007	4,700	4,700	7,050	=11750*2/5
2008	2,820	7,520	4,230	=7050*2/5
2009	1,692	9,212	2,538	=4230*2/5
2010	788	10,000	1,750
2011	-	-	-

Part 3

Journal Entry

Date	Account Title	Debit ($)	Credit ($)
31 December 2011	Cash	3,000
	Truck		1,750
	Gain on sale of Truck (3,000 - 1,750)		1,250
	(To record sale of the truck)