When Craig began operations on June 1, 2026 he contributed his own truck to the business. It was recorded at its FMV (fair-market value) of $13,495. This truck was expected to last for 4 years and have a salvage value of $2,000. Now that the business has been going strong for 7 months, Craig decided to trade-in this truck for a newer more efficient model. You have determined that this exchange has commercial substance because it will increase productivity, therefore creating more revenue for the business. He went to Brown’s Truck & Auto on December 31, 2026. Craig chose a new truck with a value of $25,500 (including taxes and fees). He also had a trailer hitch installed for $750 and had his logo painted on the sides and back for additional $1,200. The company will capitalize the entire cost of the asset. He obtained a loan for this purchase in the amount of $12,000. Record the following transactions in a journal entry: Record the depreciation expense for 2026. Round to the nearest dollar. Record the journal entry for the exchange of assets on December 31, 2026. Assume the exchange had commercial substance. Create a new account for the new truck.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
When Craig began operations on June 1, 2026 he contributed his own truck to the business. It was recorded at its FMV (fair-market value) of $13,495.
This truck was expected to last for 4 years and have a salvage value of $2,000.
Now that the business has been going strong for 7 months, Craig decided to trade-in this truck for a newer more efficient model. You have determined that this exchange has commercial substance because it will increase productivity, therefore creating more revenue for the business.
He went to Brown’s Truck & Auto on December 31, 2026. Craig chose a new truck with a value of $25,500 (including taxes and fees). He also had a trailer hitch installed for $750 and had his logo painted on the sides and back for additional $1,200. The company will capitalize the entire cost of the asset. He obtained a loan for this purchase in the amount of $12,000.
Record the following transactions in a
- Record the
depreciation expense for 2026. Round to the nearest dollar.
- Record the journal entry for the exchange of assets on December 31, 2026. Assume the exchange had commercial substance. Create a new account for the new truck.
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