Problem 11 - Accounting

Question

Prior to adjustment at the end of the year, the balance in Trucks is \(250,900 and the balance in Accumulated Depreciation—Trucks is \)88,200. Details of the subsidiary ledger are as follows: Accumulated Miles Estimated Estimated Depreciation Operated Truck Residual Useful at Beginning During No. Cost Value Life of Year Year 1 \(50,000 \) 6,500 150,000 miles — 23,000 miles 2 72,900 9,900 300,000 $60,000 25,000 3 38,000 3,000 200,000 8,050 36,000 4 90,000 13,000 200,000 20,150 40,000 a. Determine the depreciation rates per mile and the amount to be credited to the accumulated depreciation section of each of the subsidiary accounts for the miles operated during the current year. b. Journalize the entry to record depreciation for the year.

Step-by-Step Solution

Answer

Depreciation rates: Truck 1: 0.29, Truck 2: 0.21, Truck 3: 0.175, Truck 4: 0.385. Total depreciation: 33,620. Journal entry: Debit Depreciation Expense 33,620; Credit Accumulated Depreciation—Trucks 33,620.

Step 1: Calculate the Depreciation Rate per Mile

To determine the depreciation rate for each truck, we subtract the estimated residual value from the cost and divide by the estimated useful life in miles. For Truck 1:\[ \text{Depreciation Rate per Mile} = \frac{50,000 - 6,500}{150,000} = 0.29 \text{ per mile} \]For Truck 2:\[ \text{Depreciation Rate per Mile} = \frac{72,900 - 9,900}{300,000} = 0.21 \text{ per mile} \]For Truck 3:\[ \text{Depreciation Rate per Mile} = \frac{38,000 - 3,000}{200,000} = 0.175 \text{ per mile} \]For Truck 4:\[ \text{Depreciation Rate per Mile} = \frac{90,000 - 13,000}{200,000} = 0.385 \text{ per mile} \]

Step 2: Calculate Depreciation for the Year

Multiply the depreciation rate per mile by the number of miles operated during the year to find the depreciation expense for each truck.For Truck 1:\[ \text{Depreciation} = 23,000 \times 0.29 = 6,670 \]For Truck 2:\[ \text{Depreciation} = 25,000 \times 0.21 = 5,250 \]For Truck 3:\[ \text{Depreciation} = 36,000 \times 0.175 = 6,300 \]For Truck 4:\[ \text{Depreciation} = 40,000 \times 0.385 = 15,400 \]

Step 3: Total the Depreciation for All Trucks

Add the depreciation amounts for all trucks to find the total depreciation to be credited to Accumulated Depreciation—Trucks.\[ \text{Total Depreciation} = 6,670 + 5,250 + 6,300 + 15,400 = 33,620 \]

Step 4: Journalize the Depreciation Entry

To record the depreciation for the year, we need to make a journal entry. The entry will debit Depreciation Expense and credit Accumulated Depreciation—Trucks by the total depreciation calculated.- **Debit:** Depreciation Expense \(33,620\)- **Credit:** Accumulated Depreciation—Trucks \(33,620\)This records the depreciation expense for the year and increases the accumulated depreciation.

Key Concepts

Journalizing Depreciation

Depreciation is a key component in accounting used to allocate the cost of tangible assets over their useful life. When we talk about journalizing depreciation, we refer to the process of recording the depreciation expense in the financial records.
This is done through a journal entry, which impacts two primary accounts: Depreciation Expense and Accumulated Depreciation.

Here's a quick overview of how it's done:

• **Depreciation Expense** is debited, as it represents an expense decreasing net income.
• **Accumulated Depreciation** is credited, as it represents a contra-asset account. This means it offsets the asset's value.

For example, if the total depreciation for all trucks at the end of the year is calculated as $33,620, the journal entry would look like this:
- **Debit:** Depreciation Expense $33,620
- **Credit:** Accumulated Depreciation—Trucks $33,620

This journal entry helps to ensure that the financial statements accurately reflect the depreciation, maintaining compliance with accounting principles and revealing the reduced book value of the assets.

Depreciation Rate per Mile

Calculating the depreciation rate per mile is crucial for businesses that use vehicles extensively. Instead of a fixed annual depreciation, this method allocates cost based on usage, often a more accurate reflection of wear and tear.

To find this rate, you'll need:

• The initial cost of the vehicle.
• The estimated residual value, which is the vehicle's worth after its useful life.
• The total expected mileage over its useful lifetime.

The formula is:\[\text{Depreciation Rate per Mile} = \frac{\text{Cost} - \text{Residual Value}}{\text{Estimated Total Miles}}\]
For instance, for Truck 1, with a cost of \(50,000, a residual value of \)6,500, and an estimated life of 150,000 miles, the rate is calculated as:\[\frac{50,000 - 6,500}{150,000} = 0.29 \text{ per mile}\]
This rate helps allocate expenses accurately as it's multiplied by the actual miles driven during the period to determine the depreciation expense.

Accumulated Depreciation

Accumulated Depreciation is an accounting method used to track the total depreciation of an asset since it was acquired. This account is cumulative, meaning it accumulates over the asset's life.

Here are some key points to understand:

• **Contra Asset:** It's classified as a contra-asset account because it reduces the value of the associated asset. For instance, the account Accumulated Depreciation—Trucks serves to decrease the recorded value of trucks.
• **Recording Movement:** Each period, a portion of the asset's cost is moved to this account to reflect usage, degradation, or aging.
• **Impact on Book Value:** As depreciation is recorded, the asset’s book value is decreased, which is its original cost minus accumulated depreciation.

By the end of the accounting period, the total depreciation calculated (such as $33,620 for the trucks in the exercise) increases this account, reflecting the ongoing decrease in the asset's utility and the consequent adjustment in its financial statement representation.