Question

In: Accounting

On the first business day of 20x0, Whinny Corporation purchased for cash a new truck from...

On the first business day of 20x0, Whinny Corporation purchased for cash a new truck
from its local dealer. The truck was a heavy-duty type and records indicated it should
have a useful life of 10 years and a residual value of $10,000. The vehicle cost $120,000.
The straight-line depreciation method is used.
During the first week of January 20x4, the truck was repaired and rebuilt at a total cost of
$18,000: $16,300 for additions and $1,700 for ordinary repair. The additions increased
the efficiency of the vehicle and increased the total useful life of the vehicle to 12 years.
The estimate or residual value changed to $6,500.
On April 1, 20x5, the truck was completely wrecked. The insurance company settled the
claim for $35,000.
Required –
Prepare journal entries for:
a) The purchase of the vehicle.
b) Depreciation during the first year.
c) The 20x4 transaction involving the rebuilding.
d) The 20x4 depreciation.
e) The 20x5 entries.

Solutions

Expert Solution

Whinny Corporation
Cost of Acquisition $                                                1,20,000.00
Residual Value $                                                  10,000.00
Useful Life 10 Years
Depreciation Method SLM  
Depreciation Per Year (Acquisition Cost - Residual Value ) / Useful Life
(120000-10000)/10
$                                                  11,000.00
a) Journal entry for Acquisition:
Asset A/c Dr $       1,20,000.00
To Cash A/c $1,20,000.00
(Purchase of Truck)
b) Depreciation during the first Year:
Depreciation A/c Dr $          11,000.00
To Accumulated Depreciation A/c $   11,000.00
(Depreciation provided on the truck)
c) Transactions involving rebuilding
Rebuilding cost involves additions of $16,300 and ordinary repair of $1,700. Additions increased efficiency and useful life.
Hence only additions are capitalized and ordinary repair cost is charged to Profit and Loss Account
i) Entry for Additions
Asset A/c Dr $          16,300.00
To Cash A/c $   16,300.00
(Additions to Truck capitalized)
i) Entry for Ordinary Repair
Repairs and Maintenance A/c Dr $           1,700.00
To Cash A/c $     1,700.00
(Repairs for Truck)
d) 20X4 Depreciation
Since change in salvage value and useful life is change in accounting estimate, the change in depreciation is provided prospectively.
Since it was purchased 3 years ago, accumulated depreciation was 3*11,000 = $ 33,000
Asset value at beginning of 20X4 120000-33000 $   87,000.00
Additions $   16,300.00
Asset value along with additions $1,03,300.00
Revised salvage value $     6,500.00
Revised useful life 12 Years
Balance useful life 12-3 9 Years
Revised Depreciation (103300-6500)/9 $   10,755.56
Entry for Depreciation
Depreciation A/c Dr $          10,755.56
To Accumulated Depreciation A/c $   10,755.56
(Depreciation provided on truck)
e) 20X5 Entries
Truck wrecked on April 1 20X5. Depreciation till March 31, 20X5=10755.56/12*3= $2,688.89
Total Accumulated depreciation on Asset = Depreciation till year 20X3 @ 11,000 per year for 3 years + Depreciation for year 20X4 @ 10,755.56 for 1 year + Depreciation till March 31, 20X5
=11000*3+10755.56*1+2688.89 $          46,444.45
Purchase Value $       1,20,000.00
Add: Additions $          16,300.00
Less: Accumulated Depreciation $        (46,444.45)
Book value as on April 1, 20X5 $          89,855.55
Claim settlement Received $          35,000.00
Loss on settlement =89855.55-35000 $   54,855.55
Journal Entries :
Depreciation A/c Dr $           2,688.89
To Accumulated Depreciation A/c $     2,688.89
(Depreciation provided on the truck)
Cash A/c             Dr. $          35,000.00
Profit/Loss A/c $          54,855.55
   To Asset A/c $1,36,300.00
   To Accumulated Depreciation A/c $   46,444.45
(To Record the Sale of Asset)

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