Question

Safety Truck Company is a large trucking company. The company uses the units-of-production (UOP) method to depreciate its trucks. To follow are facts about one Mack truck in the company's fleet. (Click the icon to view the facts.) Read the requirements. Red Beg for a More info - X When this truck was acquired in 2021, the tractor-trailer rig had cost $450,000 and was expected to remain in service for 10 years or 1,000,000 miles. Its estimated) residual value was $70,000. During 2021, the truck was driven 78,000 miles; during 2022, 140,000 miles; and during 2023, 175,000 miles. After the truck was driven 46,000 miles in 2024, the company traded in the Mack truck for a Freightliner truck with fair market value of $300,000. In addition to the trade-in of the Mack truck, Safety Truck Company paid cash of $29,000 for the Freightliner truck. Requirements. 1. Determine Safety's gain or loss on the transaction. 2. Prepare the journal entry to record the trade-in of the old truck for the new one. Use two decimal places for depreciation cost per mile. determine the amount.

Answer 1

To determine the gain or loss on the trade-in of the Mack truck, calculate the depreciation per mile, apply it to the mileage driven, find the book value, and compare it to the value received in exchange for the new truck. Prepare a journal entry that reflects the exchange of assets, cash paid, and any resulting gain or loss.

Step-by-step explanation:

The student's question involves calculating the gain or loss on the sale of a Mack truck using the units-of-production method for depreciation and making the corresponding journal entry for the trade-in transaction. First, we must determine the depreciation expense for the truck over its period of use and then calculate the truck's book value at the time of the trade-in. With the truck's original cost being $450,000, estimated residual value of $70,000, and expected lifetime of 1,000,000 miles, we can calculate the depreciation expense per mile and multiply this by the total mileage driven up until the trade-in. After determining the accumulated depreciation, we subtract this from the original cost to get the book value. Upon trading in the truck and paying $29,000 cash for the new Freightliner truck, we combine the cash payment and the fair market value of the new truck to find out the total value received in the exchange. Comparing this to the book value of the Mack truck allows us to determine the gain or loss on the transaction.

For the journal entry, we would debit the new vehicle asset account and credit the old vehicle asset account, accumulated depreciation, cash, and any gain or loss as appropriate.

Answer 2

Safety Truck Company has a loss of $29,900 on the transaction.

Step-by-step explanation:

To calculate Safety Truck Company's gain or loss on the transaction, we need to compare the trade-in value of the Mack truck with its book value. The book value can be calculated by subtracting the accumulated depreciation from the original cost of the truck. Since the truck was acquired in 2021 and it is now 2024, the truck has been in service for 4 years. Based on the units-of-production method, the depreciation cost per mile is calculated as:

Depreciation Cost per Mile = (Original Cost - Residual Value) / Estimated Total Miles

Using the given information, the depreciation cost per mile is:

(450,000 - 70,000) / 1,000,000 = $0.38

The total accumulated depreciation for the truck after driving 78,000 miles in 2021, 140,000 miles in 2022, and 175,000 miles in 2023 is:

(78,000 + 140,000 + 175,000) * $0.38 = $149,100

The book value of the Mack truck in 2024 before the trade-in is:

Book Value = Original Cost - Accumulated Depreciation

Book Value = 450,000 - 149,100 = $300,900

The fair market value of the new Freightliner truck is $300,000 and Safety Truck Company also paid $29,000 in cash. Therefore, the gain or loss on the transaction is:

Gain/Loss = Fair Market Value of New Truck - Book Value of Old Truck - Cash Paid

Gain/Loss = 300,000 - 300,900 - 29,000 = -$29,900

Therefore, Safety Truck Company has a loss of $29,900 on the transaction.