Q9-29E - Horngren'S Financial And Managerial Accounting

Question

Question: Measuring asset cost, units-of-production depreciation, and asset trade Wimot Trucking Corporation uses the units-of-production depreciation method because units-of-production best measures wear and tear on the trucks. Consider these facts about one Mack truck in the company’s fleet. When acquired in 2015, the rig cost \(360,000 and was expected to remain in service for 10 years or 1,000,000 miles. Estimated residual value was \)90,000. The truck was driven 80,000 miles in 2015, 120,000 miles in 2016, and 160,000 miles in 2017. After 44,000 miles, on March 15, 2018, the company traded in the Mack truck for a less expensive Freightliner. Wimot also paid cash of $20,000. Fair market value of the Mack truck was equal to its net book value on the date of the trade.

 Requirements 

1. Record the journal entry for depreciation expense in 2018. 

2. Determine Wimot’s cost of the new truck.

 3. Record the journal entry for the exchange of assets on March 15, 2018. Assume the exchange had commercial substance

Step-by-Step Solution

Answer

Answer

1. Depreciation expenses for the year 2018 are $11,880.
2. The cost of the new truck is $270,920.
3. No gain or loss occurred on the exchange of the asset.

 

Step 1: Definition of Units of Production Method

A depreciation method that allocates varying depreciation each year based on an asset’s usage or according to output in units made by an asset is known as the units of production method.

Step 2: Journal entry for year 2018

Date	Accounts and Explanation	Debit ($)	Credit ($)
2018	Depreciation expenses	11,880
	Accumulated depreciation		11,880
	(To record the depreciation expenses for year 2018)

Working note:

$$\begin{gathered} Depreciation expenses=\frac{Cost-Salvage value}{Useful life in miles} \\ =\frac{\$360,000-\$90,000}{1,000,000} \\ =\$0.27 per mile. \end{gathered}$$$$\begin{gathered} Depreciation expenses for 2018=Depreciation expenses for Mile\times Miles in 2018 \\ =\$0.27\times 44,000 \\ =\$11,8800 \end{gathered}$$

Step 3: Calculation of cost of new truck

Particular	Amount $
Book value of assets	$250,920
Cash paid	20,000
Total cost of new truck	$270,920

Working note:

Calculation of total accumulated depreciation:

$$\begin{gathered} Depreceation expenses upto 2018=Depreciation expenses per mile\times Miles upto March 15 2018 \\ =\$0.27\times \left(80,000+120,000+160,000+44,000\right) \\ =\$109,080 \end{gathered}$$

 

Step 4: Journal entry for exchange of asset

Date	Accounts and Explanation	Debit ($)	Credit ($)
15 March 2018	New Truck	270,920
	Accumulated depreciation	109,080
	Cash		20,000
	Old truck		360,000
	(To record the exchange of old truck with new truck)