a Moying Company purchased a new moving van on October 1, 2011. The cash price P

Question

a Moying Company purchased a new moving van on October 1, 2011. The cash price Problem 11-3 Eagle ofthe new van was S33,750, and the company received a trade-in allowance of S5,600 for a Update deprecatbf pant nede, The balance was paid in cash. The 2009 model had been acquired on January 1, 2009 modet of $22,500. Depreciation has been recorded through December 31, 2010, on record exchange of plant asset for similar asset (L.O. 2) sis, with three years of expected useful life and no expected salvage value. he exchange has no commercial substance. l entries to update the depreciation and to record the exchange of the moving epar Required

Explanation / Answer

Calculation of depreciation on 2009 Model as per straight line method,

= (Cost of Asset-Salvage value)/expected usefullife

= ($ 22,500-$0)/3

Depreciation per year of 2009 model van as per straight line method of depreciation=$ 7,500 Per Year

Calculation of Gail or Loss on exchange of 2009 Model:

Cost 22,500

Less: Depreciation from 1 jan 2009 to 30 Sept 2011 (20,625)

[$7,500(2009 year)+$7,500(2010 year)+$5,625 (7500/12*9months)(2011 Jan - 2011 Sept)]

Book value of 2009 Model after depreciation as on 1 Oct 2011 = $22500-20625 = $1875

Gain on 2009 model exchange = Trade in allowance - Book value calculated above = $5,600-$1,875 = $3,725

Journal Entries: (Amounts in $)

2009

1 Jan 2009 2009 Model vanA/c Dr 22,500

To CashA/c 22,500

(Being 2009 Model van purchased)

31 Dec 2009 Depreciation A/c Dr 7,500

To 2009 Model Van A/c 7.500

(Being Depeciation for the year 2009 Accounted as per straight line method)

31 Dec 2009 P&L A/c Dr 7,500

To Depreciation A/c 7.500

(Being Depeciation for the year 2009 charged to P& L A/c)

2010

31 Dec 2010 Depreciation A/c Dr 7,500

To 2009 Model Van A/c 7.500

(Being Depeciation for the year 2009 Accounted as per straight line method)

31 Dec 2010 P&L A/c Dr 7,500

To Depreciation A/c 7.500

(Being Depeciation for the year 2010 charged to P& L A/c)

2011

1 Oct 2011 Motor Van 2011A/c Dr 33,750

To 2009 Model VanA/c 5,600

To Cash A/c (33,750-5,600) 28,150

(Being New Van purchased for $33,750 exchanging Old 2009 model van for trade allowance of 5,600 and rest 28,150 paid in cash)  

1 Oct 2011 Depreciation A/c Dr 5,625

To 2009 Model VanA/c 5,625

(Being Depreciation till date of exchage charged to 2009 model i.e, for 9months from jan to sept)

1 Oct 2011 2009 Model Van A/c Dr 3,725

To Gain on exchange of old assetA/c 3,725

(Being gain realized on exchange of 2009 model on purchase of new motor van recorded)

31 Dec 2011 P&L A/c Dr 5,625

Gain on exchange of old AssetA/c Dr 3,725

To Depreciation A/c 5,625

To   P&L A/c 3,725

(Being current year depreciation and gain on 2009 model transferred to p&L A/c)

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