Question

Tower Company owned a service truck that was purchased at the beginning of 2018 for $31,000. It had an estimated life of three years and an estimated salvage value of $4,000. Tower company uses straight-line depreciation. Its financial condition as of January 1, 2020, is shown in the following financial statements model.

Assets

=

Equity

Revenue

?

Expense

=

Net Income

Cash Flow

Cash

+

Mach.

?

Accumulated Depreciation

=

Common Stock

+

Retained Earnings

20,000

+

31,000

?

18,000

=

9,000

+

24,000

NA

?

NA

=

NA

NA

In 2020, Tower Company spent the following amounts on the truck:

Jan.	4		Overhauled the engine for $6,000. The estimated life was extended one additional year, and the salvage value was revised to $3,000.
July	6		Obtained oil change and transmission service, $250.
Aug.	7		Replaced the fan belt and battery, $350.
Dec.	31		Purchased gasoline for the year, $7,500.
	31		Recognized 2018 depreciation expense.

Record the 2020 transactions in a statements model like the preceding one. (In the Cash Flow column, use the initials OA to designate operating activity, IA for investing activity, FA for financing activity, NC for net change and NA for not affected. Round your answers to the nearest dollar amount. Enter any decreases to account balances with a minus sign.)

TOWER COMPANY Statements Model for 2020 Assets = Stockholders’ Equity Revenue ? Expense = Net Income Cash Flow Date Cash + Mach. ? Accumulated Depreciation = Common Stock + Retained Earnings ? = Balance 20,000 + 31,000 ? 18,000 = 9,000 + 24,000 ? = NA 1/4 (6,000) + 6,000 ? = + ? = (6,000) IA 7/6 (250) + ? = + (250) ? 250 = (250) (250) OA 8/7 (350) + ? = + (350) ? 350 = (350) (350) OA 12/31 (7,500) + ? = + (7,500) ? 7,500 = (7,500) (7,500) OA 12/31 + ? 8,000 = + (8,000) ? 8,000 = (8,000) NA Total 5,900 + 37,000 ? 26,000 = 9,000 + 7,900 0 ? 16,100 = (16,100) (14,100) NC

Answer 1

1/4 Transaction:

Overhaul cost of $6000 is capital expenditure and therefore will increase Truck cost ($6000) and decrease cash by (-$6000).It will also decrease cash in cash flow from investing activities (IA)

7/6 Transaction :

Since this is normal repair, it will increase expenses by $250 and decrease cash, net income, retained earnings and cash flow (OA) by (-$250).

8/7 Transaction:

Since this is normal repair, it will increase expenses by $350 and decrease cash, net income, retained earnings and cash flow (OA) by (-$350).

12/31 Transaction:

Since this is normal repair, it will increase expenses by $7500 and decrease cash, net income, retained earnings and cash flow (OA) by (-$7500).

12/31 Transaction:

Book value of truck = Cost - Accumulated Depreciation = $31000 - $18000 = $13000

New cost = $13000 + $6000 = $19000, New salvage value =$3000, Remaining useful life = 2 years

New Depreciation = (New cost - New salvage value)/ Remaining useful life = ($19000-$3000)/2= $8000

$8000 will increase expenses,decrease retained earnings and net income

So, under accumulated depreciation, we will write $8000

under expense column $8000 will be written

under net income column (-$8000) will be written  

under retained earnings column (-$8000) will be written  

NA to cash flows.