Chapter 11, Problem 5P

Group and Composite Depreciation Chcadle Company purchased a fleet of 20 delivery trucks for $8,000 each on January 2, 2019. It decided to use composite depreciation on a straight-line basis and calculated the depreciation from the following schedule:

Cheadle actually retired the trucks according to the following schedule (assume each truck was retired at the beginning of the year):

Required:

1. 1. Prepare the journal entries necessary to record the preceding events.
2. 2. Assume that the company expected all the trucks to last 4 years and be retired for $1,600 each. Using group depreciation, prepare journal entries for all 6 years, assuming the company retired the trucks as shown by the latter schedule.

To determine

Prepare the necessary journal entries to record the given transactions.

Explanation of Solution

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

Prepare the necessary journal entries to record the given transactions as follows:

Date	Account Title & Explanation	Debit ($)	Credit($)
January 2, 2019	Trucks (1)	160,000
	Cash		160,000
	(To record the purchase of trucks for cash)
December 31, 2019	Depreciation expense (2)	30,400
	Accumulated depreciation-Trucks		30,400
	(To record the depreciation expense incurred at the end of the accounting year)
January 1, 2020	Cash	4,000
	Accumulated depreciation-Trucks $\left(\$8,000-\$4,000\right)$	4,000
	Trucks $\left(\$8,000\times 1\text{ truck}\right)$		8,000
	(To record the retirement of trucks ( truck retired at 2020))
December 31, 2020	Depreciation expense (4)	28,880
	Accumulated depreciation-Trucks		28,880
	(To record the depreciation expense incurred at the end of the accounting year)
January 1, 2021	Cash	11,000
	Accumulated depreciation-Trucks $\left(\$24,000-\$11,000\right)$	13,000
	Trucks $\left(\$8,000\times 3\text{ trucks}\right)$		24,000
	(To record the retirement of trucks (3 trucks retired at 2021))
December 31, 2021	Depreciation expense (4)	24,320
	Accumulated depreciation-Trucks		24,320
	(To record the depreciation expense incurred at the end of the accounting year)
January 1, 2022	Cash	19,000
	Accumulated depreciation-Trucks $\left(\$48,000-\$19,000\right)$	29,000
	Trucks $\left(\$8,000\times 6\text{ trucks}\right)$		48,000
	(To record the retirement of trucks (6 trucks retired at 2022))
December 31, 2022	Depreciation expense (4)	15,200
	Accumulated depreciation-Trucks		15,200
	(To record the depreciation expense incurred at the end of the accounting year)
January 1, 2023	Cash	6,000
	Accumulated depreciation-Trucks $\left(\$40,000-\$6,000\right)$	34,000
	Trucks $\left(\$8,000\times 5\text{ trucks}\right)$		40,000
	(To record the retirement of trucks (5 trucks retired at 2023))
December 31, 2023	Depreciation expense (4)	7,600
	Accumulated depreciation-Trucks		7,600
	(To record the depreciation expense incurred at the end of the accounting year)
January 1, 2024	Cash	4,000
	Accumulated depreciation-Trucks $\left(\$24,000-\$4,000\right)$	20,000
	Trucks $\left(\$8,000\times 3\text{ trucks}\right)$		24,000
	(To record the retirement of trucks (3 trucks retired at 2024))
December 31, 2024	Depreciation expense (4)	3,040
	Accumulated depreciation-Trucks		3,040
	(To record the depreciation expense incurred at the end of the accounting year)
January 1, 2025	Cash	1,000
	Accumulated depreciation-Trucks $\left(\$16,000-\$1,000\right)$	15,000
	Trucks $\left(\$8,000\times 2\text{ trucks}\right)$		16,000
	(To record the retirement of trucks (2 trucks retired at 2025))
December 31, 2025	Loss on disposal of property, plant and equipment (6)	5,560
	Accumulated depreciation-Trucks		5,560
	(To record the loss on disposal of property, plant and equipment)

Table (1)

Working note (1):

Calculate the total cost of trucks.

$\begin{array}{c}\text{Cost of trucks = Cost per truck}\times \text{ Number of trucks purchased}\\ \text{=\$8,000}\times \text{20}\\ \text{=\$160,000}\end{array}$

Working note (2):

Figure (1)

Working note (3):

Calculate the depreciation rate.

$\begin{array}{c}\text{Depreciation rate = }\left[\frac{\text{Total annual depreciation for retired trucks}}{\text{Total cost of trucks}}\times 100\right]\\ \text{=}\frac{\$30,400\text{ (2)}}{\$160,000(1)}\times 100\\ =19\%\end{array}$

Working note (4):

Calculate the depreciation expense after retirement of truck for each year.

Figure (2)

Working note (5):

Calculate the total accumulated depreciation incurred at the time of retirement of truck and total depreciation expense after retirement of truck.

Year	Accumulated depreciation incurred at the time of retirement of truck ($)	Depreciation expense for each year ($)
2019	$0	$30,400 (2)
2020	$4,000	$28,880 (4)
2021	$13,000	$24,320 (4)
2021	$29,000	$15,200 (4)
2023	$34,000	$7,600 (4)
2024	$20,000	$3,040 (4)
2025	$15,000	$0
Total depreciation	$115,000	$109,440

Table (2)

Working note (6):

Calculate the loss on disposal of property, plant and equipment.

$\begin{array}{c}\text{Loss on disposal of assets = }\left(\begin{array}{l}\left(\begin{array}{l}\text{Total accumulated depreciation}\\ \text{ incurred at the time of retirement of truck (5)}\end{array}\right)-\\ \text{Total depreciation expense for each year (5)}\end{array}\right)\\ =\$115,000-\$109,440\\ =\$5,560\end{array}$

To determine

Prepare necessary journal entries for all 6 years, if trucks are retired at $1,600 each.

Explanation of Solution

Prepare necessary journal entries for all 6 years, if trucks are retired at $1,600 each as follows:

Date	Account Title & Explanation	Debit ($)	Credit($)
January 2, 2019	Trucks (1)	1,60,000
	Cash		1,60,000
	(To record the purchase of trucks for cash)
December 31, 2019	Depreciation expense (7)	32,000
	Accumulated depreciation-Trucks		32,000
	(To record the depreciation expense incurred at the end of the accounting year)
January 1, 2020	Cash	4,000
	Accumulated depreciation-Trucks $\left(\$8,000-\$4,000\right)$	4,000
	Trucks $\left(\$8,000\times 1\text{ truck}\right)$		8,000
	(To record the retirement of trucks ( truck retired at 2020))
December 31, 2020	Depreciation expense (8)	30,400
	Accumulated depreciation-Trucks		30,400
	(To record the depreciation expense incurred at the end of the accounting year)
January 1, 2021	Cash	11,000
	Accumulated depreciation-Trucks $\left(\$24,000-\$11,000\right)$	13,000
	Trucks $\left(\$8,000\times 3\text{ trucks}\right)$		24,000
	(To record the retirement of trucks (3 trucks retired at 2021))
December 31, 2021	Depreciation expense (8)	25,600
	Accumulated depreciation-Trucks		25,600
	(To record the depreciation expense incurred at the end of the accounting year)
January 1, 2022	Cash	19,000
	Accumulated depreciation-Trucks $\left(\$48,000-\$19,000\right)$	29,000
	Trucks $\left(\$8,000\times 6\text{ trucks}\right)$		48,000
	(To record the retirement of trucks (6 trucks retired at 2022))
December 31, 2022	Depreciation expense (8)	16,000
	Accumulated depreciation-Trucks		16,000
	(To record the depreciation expense incurred at the end of the accounting year)
January 1, 2023	Cash	6,000
	Accumulated depreciation-Trucks $\left(\$40,000-\$6,000\right)$	34,000
	Trucks $\left(\$8,000\times 5\text{ trucks}\right)$		40,000
	(To record the retirement of trucks (5 trucks retired at 2023))
December 31, 2023	Depreciation expense (8)	8,000
	Accumulated depreciation-Trucks		8,000
	(To record the depreciation expense incurred at the end of the accounting year)
January 1, 2024	Cash	4,000
	Accumulated depreciation-Trucks $\left(\$24,000-\$4,000\right)$	20,000
	Trucks $\left(\$8,000\times 3\text{ trucks}\right)$		24,000
	(To record the retirement of trucks (3 trucks retired at 2024))
December 31, 2024	Depreciation expense (8)	800
	Accumulated depreciation-Trucks		800
	(To record the depreciation expense incurred at the end of the accounting year)
January 1, 2025	Cash	1,000
	Accumulated depreciation-Trucks $\left(\$16,000-\$1,000\right)$	15,000
	Trucks $\left(\$8,000\times 2\text{ trucks}\right)$		16,000
	(To record the retirement of trucks (2 trucks retired at 2025))
December 31, 2025	Loss on disposal of property, plant and equipment (11)	2,200
	Accumulated depreciation-Trucks		2,200
	(To record the loss on disposal of property, plant and equipment)

Table (3)

Working note (7):

Calculate the group depreciation cost under straight line method:

$\begin{array}{c}\text{Depreciation expenses}=\frac{\text{Acquisition cost – Residual value}}{\text{Useful life}}\\ =\frac{\text{160,000 (1)}-\text{\$32,000}}{\text{4 years}}\\ =\$32,000\text{per year}\end{array}$

Working note (8):

Calculate the depreciation rate.

$\begin{array}{c}\text{Depreciation rate = }\left[\frac{\text{Total annual depreciation for retired trucks}}{\text{Total cost of trucks}}\times 100\right]\\ \text{=}\frac{\$32,000\text{ (8)}}{\$160,000(1)}\times 100\\ =20\%\end{array}$

Working note (9):

Calculate the depreciation expense after retirement of truck for each year.

Figure (3)

Note: Depreciation expense after retirement for the year 2024 is $800, because the amount of $3,200 would reduce the book value of remaining two trucks (2 trucks) in the year 2025. Hence, the depreciation expense for 2024 is 800$\left(\frac{\$3,200}{2}\times 50\%\right)$.

Working note (10):

Calculate the total accumulated depreciation incurred at the time of retirement of truck and total depreciation expense after retirement of truck.

Year	Accumulated depreciation incurred at the time of retirement of truck ($)	Depreciation expense for each year ($)
2019	$0	$32,000 (7)
2020	$4,000	$30,400 (9)
2021	$13,000	$25,600 (9)
2021	$29,000	$16,000 (9)
2023	$34,000	$8,000 (9)
2024	$20,000	$800 (9)
2025	$15,000	$0
Total depreciation	$115,000	$112,800

Table (4)

Working note (11):

Calculate the loss on disposal of property, plant and equipment.

$\begin{array}{c}\text{Loss on disposal of assets = }\left(\begin{array}{l}\left(\begin{array}{l}\text{Total accumulated depreciation}\\ \text{ incurred at the time of retirement of truck (10)}\end{array}\right)-\\ \text{Total depreciation expense for each year (10)}\end{array}\right)\\ =\$115,000-\$112,800\\ =\$2,200\end{array}$