Assume that Inter-Provincial Transport Ltd.’s balance sheet includes the following assets under Property, Plant, and Equipment:...

Assume that Inter-Provincial Transport Ltd.’s balance sheet includes the following assets under Property, Plant, and Equipment: Land, Buildings, and Motor-Carrier Equipment. Inter-Provincial has a separate accumulated depreciation account for each of these assets except land. Further, assume that Inter-Provincial completed the following transactions in 2019:

Jan. 3 Sold motor-carrier equipment with accumulated depreciation of $67,000 (cost of $130,000) for $71,000 cash. Purchased similar new equipment with a cash price of $176,000.

July 2 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. Inter-Provincial 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.

Requirements:

Record the transactions in Inter-Provincial Transport Ltd.’s journal.

How does management choose which depreciation method to use?

Solutions

Expert Solution

	Debit	Credit
Cash	71000
Accumulated depreciation	67000
To Motor carrier equipment		130000
To Gain on sale of asset		8000
(Sale of asset )

Motor Carrier equipment	176000
To cash		176000
(Purchase of asset)

Cash	100000
Note receivable	400000
Accumulated depreciation	150000
To Building		650000
(Sale of an asset, accumulated depreciation for current year-5000)

Land	150000
Building	300000
To Cash		420000
To revalution reserve		30000
(being land and building purchased)

Depreciation expense	65428.4
To Accumulated depreciation for Motor Carrier		58678.4
To Accumulated depreciation for Building		6750
(being depreciation expenses recorded)

Depreciation Calculation

Double diminishing method
Uselful life	6 years
% straightline rate	=100/6
	16.66667
Double diminidhing depreciationexpense	=216.67%176000
	58678.4


Building
	=(book value-salvage value)/useful life
	=(300000-30000)/40
	6750

Depreciation is allocation of an asset's cost over useful life. There are several methods available for depreciation. Base on generally acceptable accounting principles the method that matches the best is selected as method for expensinf depreciation expense. Various parameters are

If the asset is to be used in equal amount during each accounting period, straightline method is choosed. It is by default and the simplest method

If the asset generates revenue in measurable quanity of e=units dr=uring each period then units of production method is used

If the asset is to be used more in early years than in later years, diminishing or doublediminishing balance method is used

ekkarill92 answered 1 year ago

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