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Chapter 10: 17Q (page 502)

Crowe Company purchased a heavy-duty truck on July 1, 2014, for \(30,000. It was estimated that it would have a useful life of 10 years and then would have a trade-in value of \)6,000. The company uses the straight-line method. It was traded on August 1, 2018, for a similar truck costing \(42,000; \)16,000 was allowed as trade-in value (also fair value) on the old truck and $26,000 was paid in cash. A comparison of expected cash flows for the trucks indicates the exchange lacks commercial substance. What is the entry to record the trade-in?

Short Answer

Expert verified

New truck debited by $42,000, accumulated depreciation debited by $9,800, loss on disposal of trucks debited by $4,200, old trucks credited by $30,000 and cash credited by $26,000 to record the trade-in.

Step by step solution

01

Calculation of accumulated depreciation and loss on disposal of trucks

AccumulatedDepreciation=OldTrucksCost-Trade-inValue×NumberofMonths=$30,000-$6,000×49120=$9,800

LossonDisposalofTrucks=BookValue-Trade-inValue=$20,200-$16,000=$4,200

02

Journal entry to record the Trade-in

Date

Particulars

Debit ($)

Credit ($)

New Trucks

$42,000

Accumulated depreciation

$9,800

Loss on disposal of trucks

$4,200

Old trucks

$30,000

Cash

$26,000

Being record the trade-in

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Most popular questions from this chapter

Question: When should debt security be classified as held-to-maturity?

(Analysis of Subsequent Expenditures) Plant assets often require expenditures subsequent to acquisition. It is important that they be accounted for properly. Any errors will affect both the balance sheets and income statements for a number of years.

Instructions

For each of the following items, indicate whether the expenditure should be capitalized (C) or expensed (E) in the period incurred.

  1. __________ Improvement.
  2. __________ Replacement of a minor broken part on a machine.
  3. __________ Expenditure that increases the useful life of an existing asset.
  4. __________ Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value.
  5. __________ Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset’s salvage value.
  6. __________ Expenditure that increases the quality of the output of the productive asset.
  7. __________ Improvement to a machine that increased its fair market value and its production capacity by 30% without extending the machine’s useful life.
  8. __________ Ordinary repairs.

(Entries for Disposition of Assets) On December 31, 2017, Travis Tritt Inc. has a machine with a book value of \(940,000. The original cost and related accumulated depreciation at this date are as follows.

Machine

\)1,300,000

Less: Accumulated depreciation

360,000

Book value

\( 940,000

Depreciation is computed at \)60,000 per year on a straight-line basis.

Instructions

Presented below is a set of independent situations. For each independent situation, indicate the journal entry to be made to record the transaction. Make sure that depreciation entries are made to update the book value of the machine prior to its disposal.

  1. A fire completely destroys the machine on August 31, 2018. An insurance settlement of \(430,000 was received for this casualty. Assume the settlement was received immediately.
  2. On April 1, 2018, Tritt sold the machine for \)1,040,000 to Dwight Yoakam Company.
  3. On July 31, 2018, the company donated this machine to the Mountain King City Council. The fair value of the machine at the time of the donation was estimated to be $1,100,000.

(Purchase of Computer with Zero-Interest-Bearing Debt) Cardinals Corporation purchased a computer on December 31, 2016, for \(105,000, paying \)30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2017. An assumed interest rate of 10% is implicit in the purchase price.

Instructions

(Round to two decimal places.)

  1. Prepare the journal entry(ies) at the date of purchase.
  2. Prepare the journal entry(ies) at December 31, 2017, to record the payment and interest (effective-interest method employed).
  3. Prepare the journal entry(ies) at December 31, 2018, to record the payment and interest (effective-interest method employed).

(Purchase and Self-Constructed Cost of Assets) Worf Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2017.

Purchase

Cash paid for equipment, including sales tax of \(5,000 \)105,000

Freight and insurance cost while in transit 2,000

Cost of moving equipment into place at factory 3,100

Wage cost for technicians to test equipment 4,000

Insurance premium paid during first year of operation 1,500

on this equipment

Special plumbing fixtures required for new equipment 8,000

Repair cost incurred in first year of operations related 1,300

to this equipment

Construction

Material and purchased parts (gross cost \(200,000;

failed to take 2% cash discount) \)200,000

Imputed interest on funds used during

construction (stock financing) 14,000

Labor costs 190,000

Allocated overhead costs (fixed—\(20,000;

variable—\)30,000) 50,000

Profit on self-construction 30,000

Cost of installing equipment 4,400

Instructions

Compute the total cost for each of these two pieces of equipment. If an item is not capitalized as a cost of the equipment, indicate how it should be reported.
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