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 on July 1, 2022, for $12,000. They expect to use the Suburban for five years and then sell the vehicle for $4,500. The following expenditures related to the vehicle were also made on July 1, 2022:

• The company pays $1,800 to GEICO for a one-year insurance policy.
• The company spends an extra $3,000 to repaint the vehicle, placing the Great Adventures logo on the front hood, back, and both sides.
• An additional $2,000 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. In addition, on October 22, 2022, the company pays $400 for basic vehicle maintenance related to changing the oil, replacing the windshield wipers, rotating the tires, and inserting a new air filter.

1

• Record the expenditures related to the vehicle on July 1, 2022. Note: The capitalized cost of the vehicle is recorded in the Equipment account.

• 2

  Record the expenditure related to vehicle maintenance on October 22, 2022.

• 3

  Record the depreciation for vehicle purchased. Use straight-line depreciation.

• 4

  Record the expiration of prepaid insurance.

• 5

  Record the closing entry for revenue accounts.

• 6

  Record the closing entry for expense accounts.

Answer 1

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Great Adventures
Workings for capitalized cost of the vehicle		Note
Purchase cost of Suburban	12,000.00
Add: Cost of repainting	3,000.00
Add: Cost of roof and trailer	2,000.00
Total Cost	17,000.00	A
Less: Residual Value	4,500.00	B
Depreciable Cost	12,500.00	C=A-B
Life (Years)	5.00	D
Annual Depreciation	2,500.00	E=C/D
Depreciation for 6 months (July to December)	1,250.00	F=E/12*6
Insurance cost will not be capitalized. It will treated as expense.
Insurance cost	1,800.00	G
Period (months)	12.00	H
Expense for 6 months (July to December)	900.00	I=G/H*6
Maintenance cost will not be capitalized. It will treated as expense.

Date	Journal entries	Debit $	Credit $
1-Jul	Equipment	17,000.00
	Cash		17,000.00
1-Jul	Prepaid Insurance	1,800.00
	Cash		1,800.00
22-Oct	Repairs	400.00
	Cash		400.00
31-Dec	Depreciation Expense	1,250.00
	Accumulated Depreciation		1,250.00
31-Dec	Insurance Expense	900.00
	Prepaid Insurance		900.00
31-Dec	There is no revenue account so no entry.
31-Dec	Income Summary	2,550.00
	Repairs		400.00
	Depreciation Expense		1,250.00
	Insurance Expense		900.00
	(Closing entry for expense accounts)