Question

1. What is the journal entry to record depreciation for a tractor that originally cost $100,000, has no salvage value, and a useful life of 5 years? Does the entry to record depreciation on the tractor affect net income?

2. What is the book value of the tractor after year 1 of depreciation? How did you calculate it? What is the book value of the tractor after 5 years of depreciation? What does this mean?

3. During the closing process, certain accounts are closed, and others are never closed. These are called temporary and permanent account, respectively. Explain which of the following are temporary and which are permanent accounts.

Depreciation Expense

Accumulated Depreciation

Gain

Loss

4. What is the normal balance and on which financial statement are the following recorded:

Gain

Loss

5. What is the journal entry to sell a tractor for $75,000 with an original cost of $100,000. It's Accumulated depreciation at the time of sell is $50,000. Be sure to calculate the gain or loss. Remember gains have a credit balance and losses have a debit balance!

6. When using the double declining method of depreciation, depreciation each year would

Increase

Decrease

7. Depreciation expense is found on which financial statement?

Income Statement

Balance Sheet

8. Each period, a company records depreciation with the following entry:

Debit Depreciation expense; Credit Accumulated Depreciation

Debit Accumulated Depreciation; Credit Depreciation Expense

Debit Truck; Credit Cash

Debit Cash; Credit Truck

9. The initial journal entry to purchase a truck would be

Debit Depreciation Expense; Credit Cash

Debit Cash; Credit Truck

Debit Truck; Credit Cash

Debit Accumulated Depreciation; Credit Cash

Answer 1

Solution 1	Cost of tractor	$                  100,000
	Less: Salvage value	$                            -
	Depreciable value	$                  100,000
	Life in years	5
	Annual depreciation	Depreciable value/life
	Annual depreciation	100000/5
	Annual depreciation	$                    20,000
	This depreciation is considered in income statement and hence
	this depreciation affect the net income.
	Depreciation                  Dr.	$                    20,000
	To Accumulated depreciation	$ 20,000
	(Being depreciation incurred)
Solution 2
	Cost of tractor	$                  100,000
	Depreciation-first year	$                    20,000
	Book value after 1 year	$                    80,000
	Cost of tractor	$                  100,000
	Depreciation-5 years	$                  100,000	20000*5
	Book value after 1 year	$                            -
	This means the tractor has been fully depreciated.
Solution 3
	Temporary accounts are those accounts which impact the profit and loss.
	These are nominal account and get closed every year with profit and loss account
	Depreciation	This is expense and hence called temporary account
	Accumulated Depreciation	This is contra asset account and accumulated in balance sheet hence called permanent account
	Gain	This is income and hence called temporary account
	Loss	This is expense and hence called temporary account
Solution 4
	Gain	This is income and has credit balance
	Loss	This is expense and has debit balance
Solution 5	Cost of tractor	$                  100,000
	Less: Accumlated depreciation	$                  (50,000)
	Book value of tractor	$                    50,000
	Selling price	$                    75,000
	Gain=	Selling price - book value
	Gain=	$                    25,000
Solution 6
	Double declining depreciation is applied on declining balance method.
	Hence depreciable base each year will reduce by each year depreciation.
	Depreciation rate will remain same for each year
	Since depreciation base is going down and depreciation rate is same, the depreciation
	expense will decrease with passage of time.
Solution 7
	Depreciation is expense and hence included in income statement.
Solution 8	Depreciation entry
	Debit Depreciation credit Accumulated depreciation
Solution 9	Truck purchase entry
	Debit Truck and credit Cash