Question

Basin Corporation had the following transactions related to its delivery truck:

Year 1
Jan. 5 Purchased for $16,600 cash a new truck with an estimated useful life of four years and a salvage value of $2,600.
Feb. 20 Installed a new set of side-view mirrors at a cost of $70 cash.
June 9 Paid $290 for an engine tune-up, wheel balancing, and a periodic chassis lubrication.
Aug. 2 Paid a $260 repair bill for the uninsured portion of damages to the truck caused by Basin's own driver.
Dec. 31 Recorded depreciation on the truck for the year.

Year 2
May 1 Installed a set of parts bins in the truck at a cost of $1,000 cash. This expenditure was not expected to increase the salvage value of the truck.
Dec. 31 Recorded depreciation on the truck for the year.

Year 3
Dec. 31 Recorded depreciation on the truck for the year.

Basinâs depreciation policies include (1) using straight?line depreciation, (2) recording depreciation to the nearest whole month, and (3) expensing all truck expenditures of $75 or less.

Required:
Prepare journal entries to record these transactions and adjustments.

Answer 1

Year 1 depreciation expense = $3,518

Year 2 depreciation expense = $3,767

Year 3 depreciation expense = $3,892

See the journal entries and the adjustments below.

Step-by-step explanation:

For Year 1:

The journal entries will as follows:

Date General Journal Debit ($) Credit ($)

Jan. 5 Delivery truck 16,600

Cash 16,600

(To record purchase of delivery truck.)

Feb. 20 Delivery truck 70

Cash 70

(To installation of a new set of side-view mirrors.)

June 9 Trucks repairs & maint. exp. 290

Cash 290

(To record cost of engine tune-up, wheel bal., & lubrication.)

Aug. 2 Trucks repairs & maint. exp. 260

Cash 260

(To record truck repair expense.)

Dec. 31 Dep. exp - Delivery Truck (w.1) 3,518

Acc. dep. exp - Delivery Truck 3,518

(To record depreciation on the truck for the year.)

For Year 2:

The journal entries will as follows:

Date General Journal Debit ($) Credit ($)

May 1 Delivery Tuck 1,000

Cash 1,000

(To record the cost of installation of a set of parts bins.)

Dec. 31 Dep. exp - Delivery Truck (w.4) 3,767

Acc. dep. exp - Delivery Truck 3,767

(To record depreciation on the truck for the year.)

For Year 3:

The journal entries will as follows:

Date General Journal Debit ($) Credit ($)

Dec. 31 Dep. exp - Delivery Truck (w.5) 3,892

Acc. dep. exp - Delivery Truck 3,892

(To record depreciation on the truck for the year.)

Workings:

Under Year 1:

w.1: Year 1 depreciation expense = (Cost of delivery tuck + Cost of installation of a new set of side-view mirrors - Salvage value) / Estimated useful life = ($16,600 + $70 - $2,600) / 4 = $3,518

Under Year 2:

w.2: Depreciation expense from Jan 1 to April 30 of Year 2 = ((Cost of delivery tuck + Cost of installation of a new set of side-view mirrors - Salvage value) / Estimated useful life) * (Number of months from Jan 1 to April 30 / Number of months in a year) = (($16,600 + $70 - $2,600) / 4) * (4 / 12) = $1,173

w.3: Depreciation expense from May 1 to Dec 31 of Year 2 = ((Cost of delivery tuck + Cost of installation of a new set of side-view mirrors + Cost of installation of a set of parts bins in the truck – Year 1 depreciation expense – Depreciation expense from Jan 1 to April 30 of Year 2 - Salvage value) / (Estimated useful months – Number of months from Jan 5 of Year 2 to April 30 of Year 2) * Number of months from May 1 to Dec 31 of Year 2 = (($16,600 + $70 + $1,000 - $3,518 – $1,173 - $2,600) / ((4 * 12) - 16) * 8 = $2,595

w.4: Year 2 depreciation expense = Depreciation expense from Jan 1 to April 30 + Depreciation expense from May 1 to Dec 31 = $1,173 + $2,595 = $3,767

Under Year 3:

W.5: Year 3 depreciation expense = ((Cost of delivery tuck + Cost of installation of a new set of side-view mirrors + Cost of installation of a set of parts bins in the truck – Year 1 depreciation expense – Depreciation expense from Jan 1 to April 30 of Year 2 - Salvage value) / (Estimated useful months – Number of months from Jan 5 of Year 2 to April 30 of Year 2) * Number of months from Jan. 1 to Dec 31 of Year 3 = (($16,600 + $70 + $1,000 - $3,518 – $1,173 - $2,600) / ((4 * 12) - 16) * 12 = $3,892