Chapter 9, Problem 4BP

To determine

Prepare journal entries to record the given transaction.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Plant Assets:

Plant assets are the long-term assets used by the company, which have physical existence, and can be seen, touched and felt. Some of the examples of the plant assets include equipment, buildings, furniture and fixtures, plant, property, and land.

Journalize the given transactions as follows:

• On March 1 of Year 1 SD Service purchased a new truck for $32,500 cash.

Date		Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
Year 1
March	1	Equipment (A+)		32,500
		Cash (A–)			32,500
		(To record purchase of equipment)

Table (1)

Description:

• Equipment is an asset account and it is increased. Therefore, debit Equipment account with $32,500.
• Cash is an asset account and it is decreased. Therefore, credit Cash account with $32,500.
• On March 2 of Year 1, SD Service incurred painting charges of $600:

Date		Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
Year 1
March	2	Painting Expenses (E–)		600
		Cash (A–)			600
		(To record painting expenses for the truck)

Table (2)

Description:

• Painting Expenses is an expense account and it is increased by $600. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Painting Expenses account with $600.
• Cash is an asset account and it is decreased. Therefore, credit Cash account with $600.
• On December 31 of Year 1, SD Service recorded depreciation on the truck for the year:

Date		Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
Year 1
December	31	Depreciation Expense (E–) (1)		4,275
		Accumulated Depreciation –           Equipment (A–)			4,275
		(To record depreciation expense)

Table (3)

Description:

• Depreciation Expense is an expense account and it is increased by $4,275. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Depreciation Expenses account with $4,275.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $4,275.

Working Notes:

Compute depreciation expense:

$\begin{array}{c}\text{Depreciation = }\frac{\text{Acquisition cost – Salvage value}}{\text{Useful life}}\times \text{Time period}\\ \text{= }\frac{\text{\$32,500– \$6,850}}{\text{5 years}}\times \frac{10}{12}\\ \text{= \$4,275}\end{array}$ (1)

• On July 1 of Year 2, SD Service installed air conditioning for $1,808 cash in the truck:

Date		Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
Year 2
July	1	Equipment (A+)		1,808
		Cash (A–)			1,808
		(To record installation of air conditioning)

Table (4)

Description:

• Equipment is an asset account and it is increased. Therefore, debit Equipment account with $1,808.
• Cash is an asset account and it is decreased. Therefore, credit Cash account with $1,808.
• On September 7 of Year 2, SD Service incurred expenses of $450 for truck tune up maintenance:

Date		Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
Year 2
September	7	Maintenance Expenses (E–)		450
		Cash (A–)			450
		(To record maintenance expenses)

Table (5)

Description:

• Maintenance Expense is an expense account and it is increased by $450. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Maintenance Expenses account with $450.
• Cash is an asset account and it is decreased. Therefore, credit Cash account with $450.
• On December 31 of Year 2, SD Service recorded depreciation on the truck for the year:

Date		Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
Year 2
December	31	Depreciation Expense (E–) (5)		6,241
		Accumulated Depreciation –           Equipment (A–)			6,241
		(To record depreciation expense)

Table (6)

Description:

• Depreciation Expense is an expense account and it is increased by $6,241. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Depreciation Expenses account with $6,241.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $6,241.

Working Notes:

Compute depreciation expense.

$\begin{array}{c}\text{Depreciation = }\frac{\text{Acquisition cost – Salvage value}}{\text{Useful life}}\times \text{Time period}\\ \text{= }\frac{\text{\$32,500 – \$6,850}}{\text{5 years}}\times \frac{6}{12}\\ \text{= \$2,565}\end{array}$ (2)

Compute accumulated depreciation till July 1 of year 2.

Accumulated depreciation till December 31 of year 1 = $4,275 (1)

Accumulated depreciation till July 1 of year 2 = $2,565 (2)

$\begin{array}{c}\begin{array}{l}\text{Total accumulated }\\ \text{depreciation }\end{array}\}\text{= }\left\{\begin{array}{l}\text{Accumulated depreciation till December 31 of year}\\ \text{1}+\text{Accumulated depreciation till July 1 of year 2}\end{array}\right\}\\ \text{=\$4,275}+\text{\$2,565}\\ \text{=\$6,840}\end{array}$

Compute remaining depreciable amount as on July 1 of year 2:

Computation of Depreciation
Acquisition cost, March 1, year 1	$32,500
Additional air conditioning charges	1,808
Total cost	34,308
Less: Accumulated depreciation till July 1, year 2	(6,840)
Book value, July 1, year 2	27,468
Less: Revised salvage value	(7,250)
Remaining depreciable amount	$20,218

Table (7)

Compute depreciation due to change in estimate in July 1 of year 2:

Remaining depreciable amount = $20,218 (Table 7)

Number of months = 33 months (July 1 of year 2 to March 5 of year 6)

$\begin{array}{c}\text{Monthly depreciation = }\frac{\text{Remaining depreciable amount}}{\text{Number of remaining useful life}}\\ \text{= }\frac{\text{\$20,218}}{\text{33 months}}\\ \text{= \$613}\end{array}$ (3)

Compute depreciation from July 1 to December 31 of year 2:

Monthly depreciation = $613 (3)

Number of months = 6 months (July to December 31)

$\begin{array}{c}\text{Depreciation expense }=\text{ Monthly depreciation }\times \text{ Number of months}\\ =\$613\times 6\text{ months}\\ =\$3,676\end{array}$ (4)

Compute depreciation expense for year 2:

Depreciation expense from January 1 to July 1 = $2,565(2)

Depreciation expense from July 1 to December 31 = $3,676 (4)

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense }\\ \text{for year 2}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Depreciation expense from January 1 to July 1 + }\\ \text{Depreciation expense from July 1 to December 31}\end{array}\right\}\\ =\$2,565+\$3,676\\ =\$6,241\end{array}$ (5)

• On September 3 of Year 3, SD Service incurred expenses of $130 for truck maintenance:

Date		Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
Year 3
September	3	Maintenance Expenses (E–)		145
		Cash (A–)			145
		(To record maintenance expenses)

Table (8)

Description:

• Maintenance Expense is an expense account and it is increased by $145. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Maintenance Expenses account with $145.
• Cash is an asset account and it is decreased. Therefore, credit Cash account with $145.
• On December 31 of Year 3, SD Service recorded depreciation on the truck for the year:

Date		Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
Year 3
December	31	Depreciation Expense (E–) (5)		7,356
		Accumulated Depreciation –           Equipment (A–)			7,356
		(To record depreciation expense)

Table (9)

Description:

• Depreciation Expense is an expense account and it is increased by $7,356. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Depreciation Expenses account with $7,356.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $7,356.

Working Notes:

Compute depreciation for year 3:

Monthly depreciation = $613 (3)

Number of months = 12 months

$\begin{array}{c}\text{Depreciation expense}=\text{Monthly depreciation }\times \text{ Number of months}\\ =\$613\times 12\text{ months}\\ =\$7,356\end{array}$ (5)

• On December 31 of Year 4, SD Service recorded depreciation on the truck for the year:

Date		Accounts Title and Explanation	Post Ref.	Debit ($)	Credit ($)
Year 4
December	31	Depreciation Expense (E–)		7,356
		Accumulated Depreciation –           Equipment (A–)			7,356
		(To record depreciation expense)

Table (10)

Description:

• Depreciation Expense is an expense account and it is increased by $7,356. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Depreciation Expenses account with $7,356.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $7,356.