Truck A is purchased on 1-1-X1 for 15,500. Straight-linedepreciation is used, wi

Question

Truck A is purchased on 1-1-X1 for 15,500. Straight-linedepreciation is used, with a salvage value of 1,500. Estimateduseful life is 5 years. On 12-31-X4 we are going to trade intruck A for truck B with a FMV of $18,000. Trade in allowance(FMV) for Truck A is $3,500. Answer the following:

6. How much is the annual depreciation expense fortruck A using straight line depreciation?____________________

7. What is the journal entry to record depreciation forTruck A for 12-31-X1

8. What is the accumulated depreciation for truck A as of12-31-04, using straight-linedepreciation? _____________________

9. What is the book value of truck A on12-31-04?_________________

(Book value =The cost of the asset – Accumulateddepreciation)

10. What is the dollar value of the gain orloss?__________________

[Book Value – Trade In Allowance (FMV) of asset trading in= (Gain)/Loss]

11. How much cash will we have to pay out to buy truck B?_____________

(FMV of new asset – Trade in Allowance of old asset = cashneeded)

12. What is the journal entry needed to record the exchangeon 12-31-04?

Explanation / Answer

6) Straight line depreciation depreciates the same amount everyyear. You are to depreciating a total of 15500 - 1500 = 14000over 5 years. 14000 / 5 = $2800/year depreciated. 7) You debit depreciation expense on the income statement andcredit accumulated depreciation on the balance sheet. 8) 4 years have elapsed. Thus, at this point you havedepreciated a total of 4*2800 = 11200. 9) Net Book Value = Asset value - total depreciation = 15500 -11200 = $4300 10) We trade it in for a value of 3500. Thus, our gain is3500 - 4300 = -800. We have incurred a loss of 800. 11) Cash Paid = FMV - Trade in value = 18000 - 3500 = 14500 12) Credit Assets 15500 (sale of truck) Debit Accumulated depreciation 11200 Debit Assets 18000 Credit cash 14500 We have 800 that we still need to account for. This is theloss on the sale. It is debited from the incomestatement. Debit loss on sale 800 Now, if you add up all of the credits and debits, you will see thatthings balance so we are done.

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