Chapter 9, Problem 9.5APR

To determine

Disposal of Assets: Disposal is an activity of selling the worn-out assets that is no longer in need for the business, in return of some consideration. Disposal may be made in any of the following situations:

• Disposal with no gain no loss: When the asset is disposed with no consideration received.
• Disposal with gain: When the asset is disposed for more than its book value (original cost less accumulated depreciation).
• Disposal with loss: When the asset is disposed for less than its book value.

Double-declining-balance method: It is an accelerated method of depreciation under which the depreciation declines in each successive year until the value of asset becomes zero. Under this method, the book value (original cost less accumulated depreciation) of the long-term asset is decreased by a fixed rate. It is double the rate of the straight-line depreciation. Use the following formula to determine the annual depreciation:

$\text{Depreciation }=\text{ Purchase price }\times \left(\frac{2}{\text{Useful life}}\right)$

To journalize: the transactions and adjusting entries for Year 1.

Explanation of Solution

Journalize the transactions and adjusting entries for Year 1.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
Year 1
January 4	Delivery Truck		28,000
	Cash			28,000
	(To record the purchase of a used delivery truck.)
November 2	Truck Repair Expense		675
	Cash			675
	(To record the truck repair expense incurred.)
December 31	Depreciation Expense-Delivery Truck		14,000 (1)
	Accumulated depreciation-Delivery Truck			14,000
	(To record the depreciation expense for the used delivery truck.)

Working note:

Determine the amount of depreciation expense of the used delivery truck for the year1.

Cost of the used delivery truck= $28,000

Estimated Useful Life =4 years

$\begin{array}{c}\text{Depreciation}\text{Expense= Purchase price }\times \left(\frac{2}{\text{Useful life}}\right)\\ =\$28,000\times \frac{2}{4}\\ =\$14,000\end{array}$ (1)

Year 1

January 4: Record the purchase of an used delivery truck.

• Delivery Truck is an asset, and it is increased by $28,000. Therefore, debit Delivery Truck account by $28,000.
• Cash is an asset, and it is decreased by $28,000. Therefore, credit cash with $28,000.

November 2: Record the miscellaneous repairs expense incurred for delivery truck.

• Truck Repairs Expense is an expense and a component of stockholders’ equity. It is increased by $675 which reduces the stockholders’ equity. Therefore, debit Truck Repairs Expense account by $675.
• Cash is an asset, and it is decreased by $675. Therefore, credit cash with $675.

December 31: Record an adjusting entry for depreciation expense.

• Depreciation expense-Delivery Truck is an expense and a component of stockholders’ equity. It is increased by $14,000 which reduces the stockholders’ equity. Therefore, debit Depreciation Expense-Delivery Truck account by $14,000.
• Accumulated depreciation-Delivery Truck is a contra-asset with a normal credit balance. The increase in accumulated depreciation decreases the asset by $14,000. Therefore, credit Accumulated depreciation – Delivery Truck by $14,000.

To determine

To journalize: the transactions and adjusting entries for Year 2.

Explanation of Solution

Journalize the transactions and adjusting entries for Year 2.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
Year 2
January 6	Delivery Truck		48,000
	Cash			48,000
	(To record the purchase of delivery truck.)
April 1	Depreciation Expense-Delivery Truck		1,750 (2)
	Accumulated depreciation-Delivery Truck			1,750
	(To record the depreciation expense for the used delivery truck.)
April 1	Cash		15,750
	Accumulated depreciation-Delivery Truck		15,000
	Gain on sale of Delivery Truck			2,750 (3)
	Delivery Truck			28,000
	(To record the sale of the used delivery truck.)
June 11	Truck Repair Expense		450
	Cash			450
	(To record the truck repair expense incurred.)
December 31	Depreciation Expense-Delivery Truck		19,200 (4)
	Accumulated depreciation-Delivery Truck			19,200
	(To record the depreciation expense for the new truck.)

Table (2)

Working note:

Calculate the Depreciation expense for the used delivery truck sold.

Cost of the used delivery truck =$28,000

Accumulated Depreciation =$14,000 (1)

Estimated Useful Life =4 years

Number of months used in Year 2 = 3months (January 1-March 31)

$\begin{array}{c}\text{Depreciation}\text{Expense= }\left[\begin{array}{l}\left(\begin{array}{l}\text{Cost}-\text{Accumulated}\\ \text{Depreciation}\end{array}\right)\\ \times \left(\frac{2}{\text{Useful life}}\right)\\ \times \frac{\text{Number}\text{of}\text{months}\text{used}}{12}\end{array}\right]\\ =\left(\$28,000-\$14,000\right)\times \frac{2}{4}\times \frac{3}{12}\\ =\$14,000\times \frac{2}{4}\times \frac{3}{12}\\ =\$1,750\end{array}$ (2)

Calculate the gain or (loss) on the sale of the used delivery truck.

Cash received on sale =$15,000

Cost of the used delivery truck =$28,000

Accumulated Depreciation = $\text{\$15,750 }\left(\text{\$15,000 + \$1,750 }\right)$

$\begin{array}{c}\text{Gain}\text{or}\left(\text{loss}\right)\text{on}\text{sale = Sales}\text{Proceeds}-\text{Book}\text{Value}\\ \text{= Sales}\text{Proceeds}-\left(\begin{array}{l}\text{Cost}-\\ \text{Accumulated}\\ \text{Depreciation}\end{array}\right)\\ =\$15,000-\left(\$28,000-\$15,750\right)\\ =\$15,000-\$12,250\\ =\$2,750\end{array}$ (3)

Determine the amount of depreciation expense of the new delivery truck for the year2.

Cost of the new delivery truck= $48,000

Estimated Useful Life =5 years

$\begin{array}{c}\text{Depreciation}\text{Expense= Purchase price }\times \left(\frac{2}{\text{Useful life}}\right)\\ =\$48,000\times \frac{2}{5}\\ =\$19,200\end{array}$ (4)

Year 2

January 6: Record the purchase of a new delivery truck.

• Delivery Truck is an asset, and it is increased by $48,000. Therefore, debit Delivery Truck account by $48,000.
• Cash is an asset, and it is decreased by $48,000. Therefore, credit cash with $48,000.

April 1: Record the depreciation expense for the used delivery truck.

• Depreciation expense-Delivery Truck is an expense and a component of stockholders’ equity. It is increased by $1,750 which reduces the stockholders’ equity. Therefore, debit Depreciation Expense-Delivery Truck account by $1,750.
• Accumulated depreciation-Delivery Truck is a contra-asset with a normal credit balance. The increase in accumulated depreciation decreases the asset by $1,750. Therefore, credit Accumulated depreciation – Delivery Truck by $1,750.

April 1: Record the sale of the used delivery truck.

• Cash is an asset, and it is increased by $15,000. Therefore, debit cash with $15,000.
• Accumulated depreciation-Delivery Truck is a contra-asset with a normal credit balance. The decrease in accumulated depreciation increases the asset by $15,750. Therefore, debit Accumulated depreciation – Delivery Truck by $15,750.
• Gain on Sale of Delivery Truck is a gain for the company, and it increases the stockholder’s equity by $2,750. Therefore, credit Gain on Sale of Delivery Truck by $2,750.
• Delivery Truck is an asset, and it is decreased by $28,000. Therefore, credit Delivery Truck account by $28,000.

June 11: Record the miscellaneous repairs expense incurred for delivery truck.

• Truck Repairs Expense is an expense and a component of stockholders’ equity. It is increased by $450 which reduces the stockholders’ equity. Therefore, debit Truck Repairs Expense account by $450.
• Cash is an asset, and it is decreased by $450. Therefore, credit cash with $450.

December 31: Record an adjusting entry for depreciation expense.

• Depreciation expense-Delivery Truck is an expense and a component of stockholders’ equity. It is increased by $19,200 which reduces the stockholders’ equity. Therefore, debit Depreciation Expense-Delivery Truck account by $19,200.
• Accumulated depreciation-Delivery Truck is a contra-asset with a normal credit balance. The increase in accumulated depreciation decreases the asset by $19,200. Therefore, credit Accumulated depreciation – Delivery Truck by $19,200.

To determine

To journalize: the transactions and adjusting entries for Year 3.

Explanation of Solution

Journalize the transactions and adjusting entries for Year 3.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
Year 3
July 1	Delivery Truck		54,000
	Cash			54,000
	(To record the purchase of delivery truck.)
October 2	Depreciation Expense-Delivery Truck		8,640 (5)
	Accumulated depreciation-Delivery Truck			8,640
	(To record the depreciation expense for the delivery truck purchased in Year 2.)
October 2	Cash		16,750
	Accumulated depreciation-Delivery Truck		27,840
	Loss on sale of Delivery Truck		3,410 (6)
	Delivery Truck			48,000
	(To record the sale of the delivery truck purchased on Year 2.)
December 31	Depreciation Expense-Delivery Truck		6,750 (7)
	Accumulated depreciation-Delivery Truck			6,750
	(To record the depreciation expense for the new truck of Year 3.)

Table (3)

Working note:

Calculate the Depreciation expense for the delivery truck of Year 2 sold.

Cost of the delivery truck purchased in Year 2 =$48,000

Accumulated Depreciation =$19,200 (4)

Estimated Useful Life =5 years

Number of months used in Year 3 = 9 months (January 1-September 30)

$\begin{array}{c}\text{Depreciation}\text{Expense= }\left[\begin{array}{l}\left(\begin{array}{l}\text{Cost}-\text{Accumulated}\\ \text{Depreciation}\end{array}\right)\\ \times \left(\frac{2}{\text{Useful life}}\right)\\ \times \frac{\text{Number}\text{of}\text{months}\text{used}}{12}\end{array}\right]\\ =\left(\$48,000-\$19,200\right)\times \frac{2}{5}\times \frac{9}{12}\\ =\$28,800\times \frac{2}{5}\times \frac{9}{12}\\ =\$8,640\end{array}$ (5)

Calculate the gain or (loss) on the sale of the delivery truck of Year 2.

Cash received on sale =$16,750

Cost of the delivery truck of Year 2 =$48,000

Accumulated Depreciation = $\$27,840(\$19,200+\$8,640)$

$\begin{array}{c}\text{Gain}\text{or}\left(\text{loss}\right)\text{on}\text{sale = Sales}\text{Proceeds}-\text{Book}\text{Value}\\ \text{= Sales}\text{Proceeds}-\left(\begin{array}{l}\text{Cost}-\\ \text{Accumulated}\\ \text{Depreciation}\end{array}\right)\\ =\$16,750-\left(\$48,000-\$27,840\right)\\ =\$16,750-\$20,160\\ =\left(\$3,410\right)\end{array}$ (6)

Determine the amount of depreciation expense of the new delivery truck for the year3.

Cost of the new delivery truck= $54,000

Estimated Useful Life =5 years

Number of months used = 6 months (July 1-December 31)

$\begin{array}{c}\text{Depreciation}\text{Expense= }\left[\begin{array}{l}\text{Purchase price }\times \left(\frac{2}{\text{Useful life}}\right)\\ \times \frac{\text{Number}\text{of}\text{months}\text{used}}{12}\end{array}\right]\\ =\$54,000\times \frac{2}{8}\times \frac{6}{12}\\ =\$6,750\end{array}$ (7)

Year 3

July 1: Record the purchase of a new delivery truck.

• Delivery Truck is an asset, and it is increased by $54,000. Therefore, debit Delivery Truck account by $54,000.
• Cash is an asset, and it is decreased by $54,000. Therefore, credit cash with $54,000.

October 2: Record the depreciation expense for the delivery truck of Year 2.

• Depreciation expense-Delivery Truck is an expense and a component of stockholders’ equity. It is increased by $8,640 which reduces the stockholders’ equity. Therefore, debit Depreciation Expense-Delivery Truck account by $8,640.
• Accumulated depreciation-Delivery Truck is a contra-asset with a normal credit balance. The increase in accumulated depreciation decreases the asset by $8,640. Therefore, credit Accumulated depreciation – Delivery Truck by $8,640.

October 2: Record the sale of the delivery truck of Year 2.

• Cash is an asset, and it is increased by $16,750. Therefore, debit cash with $16,750.
• Accumulated depreciation-Delivery Truck is a contra-asset with a normal credit balance. The decrease in accumulated depreciation increases the asset by $27,840. Therefore, debit Accumulated depreciation – Delivery Truck by $27,840.
• Loss on Sale of Delivery Truck is a loss for the company, and it decreases the stockholder’s equity by $3,410. Therefore, debit Loss on Sale of Delivery Truck by $3,410.
• Delivery Truck is an asset, and it is decreased by $48,000. Therefore, credit Delivery Truck account by $48,000.

December 31: Record an adjusting entry for depreciation expense for the new delivery tuck of Year 3.

• Depreciation expense-Delivery Truck is an expense and a component of stockholders’ equity. It is increased by $6,750 which reduces the stockholders’ equity. Therefore, debit Depreciation Expense-Delivery Truck account by $6,750.
• Accumulated depreciation-Delivery Truck is a contra-asset with a normal credit balance. The increase in accumulated depreciation decreases the asset by $6,750. Therefore, credit Accumulated depreciation – Delivery Truck by $6,750