Question

Disposal of Plant Asset

Canyon Company has a used delivery truck that originally cost $54,200. Straight-line depreciation on the truck has been recorded for three years, with a $2,000 expected salvage value at the end of its estimated six-year useful life. The last depreciation entry was made at the end of the third year. Four months into the fourth year, Canyon disposes of the truck.

Required

Prepare journal entries to record:
a. Depreciation expense to the date of disposal.
b. Sale of the truck for cash at its book value.
c. Sale of the truck for $35,000 cash.
d. Sale of the truck for $22,000 cash.
e. Theft of the truck. Canyon carries no insurance for theft.

Answer 1

Explanation:

The correct option "A" Pass a general entry for depreciation expense to date of disposal

The organisation has been using a truck and appreciating it on straight line basis it has a useful life of 6 year original cost dollar 54200 salvage value 2000

• Depreciation for each year is (54200-2000) divided by 6 Years = $ 8700.
• And, depreciation for 4 months = (8700*4) dividend by 12 = $2900.

Therefore, the firm should charge dollar 2900 to depreciation expense for 4 months.

Other options
b. Sale of the truck for cash at its book value.
c. Sale of the truck for $35,000 cash.
d. Sale of the truck for $22,000 cash.

Are incorrect because the value of sale is not provided in the question, so we cannot assume the value for which truck has been sold.

"option E" is also incorrect because truck has been sold by the entity not stolen therefore entry for loss by theft cannot be made in the books of accounts.