Question

Question #6. Independent cases:

A. On January 1, Nets Company paid $48,000 for a new delivery truck. It was estimated that the truck would be driven 100,000 miles during the next 5 years, at which time it would have a salvage value of $3,000. During the first and second years, the odometer registered 22,000 and 40,000 miles, respectively. Calculate the depreciation expense Nets Company needs to record at the end of year I & end of year 2. Nets Company uses the Units of Production method to account for depreciation. What is the book value of the truck at the end of 2^nd year.

B. On Jan. 1, 2004, Cav Co., which uses straight-line depreciation, purchased equipment for $60,000 with a useful life of 7 years and $4,000 salvage value. On April 1, 2008, the equipment was sold for $30,000 cash. What gain or loss should Cav recognize as a result of this disposition? Indicate the impact of the disposition on the income statement & balance sheet.

C. On Nov. 1, 2005, GoodTaste Magazine received $36,000 of annual magazine subscriptions. On Dec. 31, 2005, the end of fiscal year, Management of GoodTaste decided to recognize the $36,000 as revenues for the year 2005. Do you agree with GoodTaste Management? Explain. How should GoodTaste Magazine report this in its financial statements as of Dec. 31, 2005?

Answer 1

Answer to Question A:

New Truck value: $48,000, 100,000 KMs for next 5 years, Salvage value $3,000, Year 1 KM 22,000 and Year 2 KM 40,000

Per mile Depreciation : (48,000-3000)/100000

= 45,000/100,000

= 0.45 Per miles

Year 1 Depreciation: 22,000 KMS times $0.45 ; $9,900

Year 2 Depreciation: 40,000 KMS times $0.45 ; $18,000

Book value after 2 years = $48,000- $9,900 - $18,000

= $20,100

Answer to Question B:

Jan 2004 Equipment Value $60,000, Salvage value $4,000 Life 7 Years

Yearly Deprecation straight line : ($60,000-$4,000)/7

= $8,000 per year

April 1, 2008 Equipment sold for $30,000 cash

Deprecation on books till date : 4 years + 3 months

= $8,000 *4 + ($8,000/12*3)

= $32,000 + $2,000

= $34,000

Net value on April 1, 2008 = $60,000-$4,000-$34,000

= $22,000

Profit on sale = $30,000 - $22,000 = $8,000

Company will remove the asset value from the books and accumalted depreciation.

Profit $8,000 will increase the Cash (Dr.) in balance sheet & Credit the income as other income category in Income statement account.

C. Nov 1 2005, Annual magazine subscriptions recevied was $36,000.

Entry in books :

Cash Dr $36,000

Unearned Revenue $36,000

As on Dec 31 2005 company can only book the Revenue for 2 months which is Nov & Dec by passing this

Unearned Revenue Dr. $6,000

Sale $6,000

Because company recevied money in advance to the service for next 12 months so till the time service provided Revenue can't be recogonized in the books as per GAAP.