Question

A truck was acquired on July 1, 2010, at a cost of $162,000. The truck had a nine-year useful life and an estimated salvage value of $18,000. The straight-line method of depreciation was used. On January 1, 2014, the truck was overhauled at a cost of $15,000, which extended the useful life of the truck for an additional two years beyond that originally estimated (salvage value is still estimated at $18,000). In computing depreciation for annual adjustment purposes, expense is calculated for each month the asset is owned. Instructions: Prepare the appropriate entries for January 1, 2014 and December 31, 2014.

Answer 1

January 1st 2014

DR Truck {Property, plant and equipment} $15,000

CR Cash $15,000

December 31st, 2014

DR Income Summary $13,733

CR Depreciation expense $13,733

Step-by-step explanation:

Depreciation per year

$162,000 - $18,000

=$144,000

=$144,000 / 9 years

=$16,000/year

=$16,000 * 3.5 years

=$56,000

Net Book Value of Truck on January 1st 2014

=$162,000 - $56,000

=$106,000

The truck was overhauled for $15,000 {It is a capital expenditure because life is increased}

On January 1st 2014

DR Truck {Property, plant and equipment} $15,000

CR Cash $15,000

Net Book Value after repair

$106,000 + $15,000

=$121,000

Calculate depreciation for the next years

$121,000 - $18,000

=$103,000 / 7.5 years {9 years - 3.5 years + 2 years}

=$13,733 / year

On December 31st, 2014

DR Income Summary $13,733

CR Depreciation expense $13,733.