ACCT 201 Principles of Financial Accounting Practice Exam - Chapter 8 Reporting & Analyzing Long-Term Assets Dr. Fred Barbee Solution to Problem #1

On January 2, 2001, a company purchased a delivery truck for $45,000 cash. The truck had an estimated useful life of seven years and an estimated salvage value of $3,000. The straight-line method of depreciation was used. Prepare the journal entries to record the disposition of the truck on September 1, 2005, under each of the following assumptions:

1. The truck and $45,000 cash were given in exchange for a new delivery truck that had a cash price of $60,000.

2. The truck and $40,000 cash were exchanged for a new delivery truck that had a cash price of $65,000.

Solution - Part 1:

Delivery Truck (new)	60,000
Accumulated Depr - Delivery Truck (old)	28,000
Loss on Disposal of Delivery Truck	2,000
Delivery Truck (old)		45,000
Cash		45,000

Annual depreciation: ($45,000 - $3,000) / 7 years = $6,000 per year Accumulated depreciation to date: $6,000 per year x 4 2/3 years = $28,000.

Calculation:
Cost of truck	$45,000
Accumulated Depreciation on truck	28,000
Book value of truck	$17,000
Trade in allowance ($60,000 - $45,000)	15,000
Loss on the Exchange	$2,000

Solution - Part 2:

Delivery Truck (new)	57,000
Accumulated Depr - Delivery Truck (old)	28,000
Delivery Truck (old)		45,000
Cash		40,000

Calculation:
Book value of truck	$17,000
Trade in allowance ($65,000 - $40,000)	25,000
Gain on the Exchange	$8,000

Note: The gain is not recorded by the company.

Book value of old truck	$17,000
Cash paid in the exchange	40,000
Cost recorded for the new truck	$57,000