Question

Question 5

Assume Interstellar Communications Ltd.’s balance sheet includes the following assets under Property, Plant, and Equipment: Land, Buildings, and Motor-Carrier Equipment. Interstellar Communications has a separate accumulated depreciation account for each of these assets except land. Further, assume that Interstellar completed the following transactions:

•     Jan 2: Sold motor-carrier equipment with accumulated depreciation of $67,000 (cost of

$130,000) for $70,000 cash. Purchased similar new equipment with a cash price of $176,000.

•     July 3: Sold a building that had cost $650,000 and had accumulated depreciation of $145,000

through December 31 of the preceding year. Depreciation is computed on a straight-line basis. The building had a 40-year useful life and a residual value of $250,000. Interstellar received

$100,000 cash and a $400,000 note receivable.

•     Oct 29: Purchased land and a building for a single price of $420,000. An independent appraisal

valued the land at $150,000 and the building at $300,000.

•     Dec 31: Recorded depreciation as follows: New motor-carrier equipment has an expected useful

life of six years and an estimated residual value of 5% of cost. Depreciation is computed on the double-diminishing-balance method. Depreciation on buildings is computed by the straight-line method. The new building carries a 40-year useful life and a residual value equal to 10% of its cost.

1.    Please journalize each of the transactions from Jan 2nd – Dec 31st.

Answer 1

Journal Entries
Date Particulars Debit Credit
Jan2 Cash 70000 Note 1
Accumulated Depreciation 67000
To Gain on sale of motor carrier equipment 7000
To Motor Carrier Equipment 130000
( Sale of motor carrier equipment at a gain of 7000 )
Jan2 New - Motor Carrier Equipment 176000
To Cash 176000
( New motor carrier equipment purchased )
Jul-03 Cash 100000 Note 2
Notes receivable 400000
Loss on sale of building 5000
Accumulated Depreciation 145000
To Building 650000
( Building sold at a loss of 5000 )
Oct-29 Land and Building 420000
To Cash 420000
( New land and building purchased, )
Independent appraisal value - not relevant here
Dec-31 Depreciation on Motor Carrier Equipment 58666.67 Note 3
To Accumulated Depreciation 58666.67
Dec-31 Depreciation on Building 9450 Note 4
To Accumulated Depreciation 9450
Bitmap Bitmap Bitmap Bitmap
Note 1
Working for Gain on Sale of motor carrier equipment
Original Cost 130000
Accumulated dep 67000
Written down value 63000
Sale price 70000
Gain on sale 7000
Bitmap Bitmap Bitmap Bitmap
Note 2
Working for Loss on Sale of Building
Original Cost 650000
Accumulated dep 145000
Written down value 505000
Sale price 500000
Loss on sale -5000
Note 3
Depreciation on New Motor Carrier Equipment
Cost price 176000
Useful life 6 years
Salvage value - 5 % of cost 8800
Depreciation rate 16.67%
Double reducing rate 33.33%
Depreciation for the year 58,666.67
Note 4
Depreciation on New Building
Cost price 420000
Useful life 40 years
Salvage value - 10 % of cost 42000
Net Depreciable amount 378000
Depreciation for the year 9450