Question

Question 2 Diaz Company owns a lorry that cost S50,000 when purchased on April 1, 2013 Instructions: Prepare Diaz Company's journal entries for the following independent transactions. (Show the supporting calculations.) a. The lorry is sold for $34,000 cash on December 31, 2015 Assume that the lorry has been depreciated using double- declining balance method with fractional periods rounded to the nearest whole month, based on estimated salvage value of S5,000 and an estimated useful life of 20 years Answer: b. The lorry is traded-in as part of the purchase of a new lorry on December 31, 2016. The list price of the new lorry and trade-in allowance given for the old lorry are $55,000 and $34,000 respectively. Diaz Company pays $21,000 cash to get the new lorry. Assume that the old lorry has been depreciated using straight-line method with fractional periods rounded to the nearest whole month, based on estimated salvage value of S5,000 and an estimated useful life of 10 years. Answer:

Answer 1

Answer :

Part (a)

Step -1 : Calculate the WDV of lorry as at December 31, 2015

Cost of the lorry	$50,000
Estimated salvage value	$5,000
Useful life	20 Years
Date of purchase	April 01,2013
Straight - line depreciation rate (100%/20)	5%
Double -declining depreciation rate (5%*2)	10%
Depreciation for the year 2013 ($50,000 * 10%*9/12	$3,750
WDV as at the December 31,2013 (50,000- $3,750)	$46,250
Depreciation for the year 2014 ($46,250*10%)	$4,625
WDV as at December 31,2014 ($46,250 - $4,625)	$41,625
Depreciation for the year 2015 ($41,625 * 10%)	$4,163
WDV as at December 31,2015 ($41,625 - $4,163)	$37,462

Step 2 : Calculate the gain or loss on sale of lorry

Sale price	$34,000
WDV of lorry	$37,462
Gain/(loss) on sale of lorry	($3,462)

Step 3 Journal Entry

Date	Description	Debit	Credit
Dec. 31, 2015	Cash	$34,000
	Accumulated depreciation on lorry	$12,538
	Loss on sale of lorry	$3,462
	Cost - Lorry		$50,000

Part (b)

Step 1 Calculate the WDV of lorry as at December 31,2016

Cost of the lorry	$50,000
Estimated salvage value	$5,000
Depreciation cost ($50,000 - $5,000)	$45,000
Useful life	10 Year
Date of purchase	April 01, 2013
Depreciation method	Straight - line
Depreciation each year ($ 45,000 / 10 )	$4,500
Depreciation for the year 2013 ($4,500*9/12)	$3,375
Depreciation for the year 2014	$4,500
Depreciation for the year 2015	$4,500
Depreciation for the year 2016	$4,500
Accumulated Depreciation as at December 31,2016	$16,875
WDV as at December 31, 2016 ($50,000 -$16,875)	$33,125

Step 2 Calculate the Gain/ Loss on exchange

Trade - in allowance given for the old lorry	$34,000
WDV of old lorry as at December 31,2016	$33,125
Gain ($34,000 -$33,125)	$875

Srep 3 Journal Entry

Date	Description	Debit	Credit
Dec. 31, 2016	Cost - New Lorry	$55,000
	Accumulated depreciation on old lorry	$16,875
	Cost - Old Lorry		$ 50,000
	Gain		$875
	Cash		$21,000