Lancer I nc. bought a tractor for $95,000 on 1/1/04. The useful life is 8 years,
ID: 2588795 • Letter: L
Question
Lancer I nc. bought a tractor for $95,000 on 1/1/04. The useful life is 8 years, and the residual value is $5,000. L ancer uses the Double Declining Balance method in accounting for its depreciation. A) 1) Record, in journal entry form, depreciation expense for the year ended 12/31/05 2) How much is the accumulated depreciation for the year ended 12/31/06? If Lancer decides to sell the tractor at the end of the third year for $46,000, Determine the book value of the tractor-f40/07s DR CA 1) 2) Record the sale transaction. B) Assume that Lancer uses the Straight Line method in accounting for its depreciatio Calculate the depreciation expense for the year ended 12/31/07.Explanation / Answer
Lancer Inc
A
1. Journal entry to record depreciation expense for the year ended 12/31/05:
Date
Account Titles and Explanation
Debit
Credit
12/31/2005
Depreciation Expense
$17,813
Accumulated Depreciation - Tractor
$17,813
(To record depreciation expense for the year 2005)
Workings:
Cost of tractor = $95,000
Useful life = 8 years
Residual value = $5,000
Method of depreciation – double declining balance
Depreciation expense = depreciation rate x book value of asset
Depreciation rate = Accelerator x straight line rate
Straight line rate= 1/useful life = 1/8= 0.125
Accelerator is double, so, depreciation rate = 2 x 0.125 = 0.25
Depreciation for first year, 2004 = cost x depreciation rate
= $95,000 x 25% = $23,750
Depreciation expense for second year, 2005 = book value x depreciation rate
Book value = cost – accumulated depreciation
= $95,000 - $23,750 = $71,250
Depreciation expense for year 2005 = $71,250 x 25%
=$17,813
2.determination of accumulated depreciation for the year ended 12/31/2006:
Book value at the end of year 2005 = cost – accumulated depreciation
Cost = $95,000
Accumulated depreciation = depreciation expense for 2004 + depreciation expense for 2005
= $23,750 + $17,813 = $41,563
Book value at year end 2005 = $95,000 - $41,563 = $53,437
Depreciation expense for the year 2006 = book value x depreciation rate
= $53,437 x 25% = $13,359
Hence, accumulated depreciation for the year ended 12/31/2006 = $23,750 + $17,813 + $13,359 = $54,922
A2. Determination of the book value of tractor, when sold at the end of third year for $46,000:
Since the tractor is bought in the year 2004, third year is 2006 and sale takes place at the end of 2006.
Accumulated depreciation at the end of year 2006 = $54,922 (calculated in 2. Above)
Book value = cost – accumulated depreciation
= $95,000 - $54,922 = $40,078
Sale proceeds = $46,000
Gain on sale = $5,922
Date
Account Titles and Explanation
Debit
Credit
12/31/2006
Cash
$46,000
Accumulated Depreciation - Tractor
$54,922
Gain on Sale
$5,922
Tractor
$95,000
(To record sale and gain on sale of Tractor)
B. Assuming straight line method in accounting for depreciation on tractor:
Depreciation expense under straight line method = depreciable base x 1/useful life
Depreciable base = cost – residual value
Cost = $95,000
Residual value = $5,000
Depreciable base = $95,000 - $5,000 = $90,000
Useful life = 8 years
Depreciation expense = $90,000 x 1/8 = $11,250
The annual depreciation expense would remain constant under the straight line method of accounting for depreciation.
Hence, the depreciation expense for the year ended 12/31/07 would be $11,250.
Date
Account Titles and Explanation
Debit
Credit
12/31/2005
Depreciation Expense
$17,813
Accumulated Depreciation - Tractor
$17,813
(To record depreciation expense for the year 2005)
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