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Fox Ltd has purchased a truck on 1 July 2018. The list price of the truck...

Fox Ltd has purchased a truck on 1 July 2018. The list price of the truck was $200,000 but Fox Ltd was invoiced and paid only $180,000. Fox Ltd did have to pay for an inspection costing $30,000 on 1 July 2018 before the truck could be used for the first time. In addition, the company purchased an annual insurance policy for the truck costing $24,000 (recorded using the asset approach). The truck will be depreciated using the reducing balance method at a rate of 10% per annum.

On 1 September 2018, the truck broke down and Fox Ltd spent $40,000 to get it back to working condition.

On 1 July 2019, Fox Ltd decided to replace the engine in the truck with a newer model costing $61,000 that uses considerably less petrol and makes the truck more powerful so that it could also haul a trailer. The 10% reducing balance rate of depreciation is still applied.

Required:

Prepare the general journal entries for the years ended 30 June 2019 and 30 June 2020 related to the truck, taking into account the information provided above. Narrations are not required. Justify your entries.

Date

Account name

Dr

Cr

1 July 2018

Justification:

1 July 2018

Justification:

1 September 2018

Justification:

30 June 2019

I July 2019

Justification:

30 June 2020

Solutions

Expert Solution

Date Account name Dr Cr
1 July 2018 Truck 210000
Cash ($180000 + $30000) 210000
Justification: Costs incurred in purchasing the truck and putting it to its intended use are capitalized.
1 July 2018 Prepaid insurance 24000
Cash 24000
Justification: The prepaid insurance will be charged to expense over the period for which it is incurred.
1 September 2018 Repair and maintenance expense 40000
Cash 40000
Justification: The cost incurred to keep the truck in an operating condition is a revenue expense.
30 June 2019 Depreciation expense (10% x $210000) 21000
Accumulated depreciation-truck 21000
Justification: The cost of the asset is charged to expense over its useful life.
1 July 2019 Truck 61000
Cash 61000
Justification: Cost incurred to improve the performance of the truck is a capital expense.
30 June 2020 Depreciation expense [10% x ($210000 + $61000 - $21000)] 25000
Accumulated depreciation-truck 25000
Justification: The cost of the asset is charged to expense over its useful life.

ekkarill92 answered 2 years ago
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