On 1 January 2000 Fabrisio Ltd Purchased Two New Trucks
On 1 January 2000 Fabrisio Ltd Purchased Two New Trucks At A Total Co
On 1 January 2000, Fabrisio Ltd purchased two new trucks at a total cost of $250,000. It was estimated that the trucks would have a useful life of 7 years and a residual value of $20,000 each. Fabrisio Ltd. uses the straight-line method of depreciation for all of its equipment. The company's balance date is 31 December.
Assignment Tasks:
a. Record the purchase of the trucks on January 1, 2000.
b. Record the depreciation expense on trucks for 2005.
c. In early 2006, the company revalued the trucks upwards by $25,000 each and assessed that the trucks would last 4 more years instead of 1, with residual value remaining the same. Record all journal entries for the trucks in 2006.
d. Record the sale of one truck on 31 December 2006 for $27,000, assuming the two trucks had the same carrying amount.
e. Calculate the depreciation expense on the second truck during 2009 if it was still in use and residual value remained $20,000, explaining why.
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Paper For Above instruction
The accounting treatment of long-term assets such as trucks involves recording their initial purchase, subsequent depreciation, revaluations, and eventual disposal. Proper journal entries ensure accurate financial statements and compliance with accounting standards such as IFRS or GAAP.
a. Recording the Purchase of Trucks on January 1, 2000
The total cost of the two trucks was $250,000, with an estimated residual value of $20,000 each ($40,000 total). Using the straight-line depreciation method, the annual depreciation expense is calculated as:
\[
\frac{(250,000 - 40,000)}{7} = \frac{210,000}{7} = 30,000 \text{ per year}
\]
The journal entry on January 1, 2000, to record the purchase is:
```plaintext
Dr. Trucks (Asset) $250,000
Cr. Cash or Accounts Payable $250,000
```
b. Depreciation Expense for 2005
Since the trucks were purchased in 2000 and depreciated annually, the depreciation expense for each year leading to 2005 is:
\[
30,000
\]
The journal entry at year-end December 31, 2005, is:
```plaintext
Dr. Depreciation Expense $30,000
Cr. Accumulated Depreciation $30,000
```
c. Revaluation of Trucks in 2006
In early 2006, the trucks are revalued upwards by $25,000 each, totaling $50,000. Prior to revaluation, the carrying amount (book value) per truck was:
\[
250,000 - (6 \times 30,000) = 250,000 - 180,000 = 70,000
\]
(assuming depreciation over 5 years for simplicity).
After revaluation, the new value per truck becomes:
\[
70,000 + 25,000 = 95,000
\]
and for two trucks, the total new value is $190,000.
Since the trucks' remaining useful life was reassessed to 4 years with the residual value unchanged at $20,000 per truck ($40,000 total), the new annual depreciation is:
\[
\frac{(190,000 - 40,000)}{4} = \frac{150,000}{4} = 37,500 \text{ per year}
\]
The journal entry to record the revaluation involves removing the accumulated depreciation and recognizing the increase in revaluation surplus:
```plaintext
Dr. Trucks (Asset) $X (difference needed to adjust to new valuation)
Cr. Revaluation Surplus (Equity) $X
```
(Note: Precise amount depends on accumulated depreciation and previous book values.)
In practice, the journal entry increases the carrying amount to the revalued amount and adjusts for accumulated depreciation. The depreciation expense for 2006 and subsequent years will now be based on the new revalued amounts and updated useful life.
d. Sale of One Truck on December 31, 2006
Assuming the trucks had the same carrying amount before sale and one was sold for $27,000, we need to determine if there's a gain or loss.
The carrying amount is:
\[
\text{Original cost} - \text{Accumulated depreciation} \text{ (post revaluation)}
\]
Suppose the carrying amount at sale was $60,000 after depreciation; then:
Gain or loss = Sale Price – Carrying Amount.
If Carrying Amount = $60,000, then the loss = $60,000 - $27,000 = $33,000.
The journal entry for sale:
```plaintext
Dr. Cash $27,000
Dr. Accumulated Depreciation $X
Cr. Trucks (Asset) $X
Cr. Gain on Sale of Equipment (if any) / or Dr. Loss on Sale if negative $Y
```
e. Depreciation Expense for the Second Truck in 2009
If the second truck is still used in 2009 with residual value of $20,000, and assuming no further revaluation, the annual depreciation remains at $30,000, provided the original useful life and depreciation method are unchanged.
However, if the residual value or useful life has changed, depreciation needs to be recalculated accordingly.
Why?
Because with revaluations or changes in useful life, depreciation calculations are updated to reflect the new estimates, ensuring the asset's carrying amount is systematically allocated over its remaining useful life.
---
References
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