The following information was drawn from the accounting records of Chapin Company. On January 1, Year 1, Chapin paid $56,000 cash to purchase a truck. The truck had a five-year useful life and a $6,000 salvage value. As of December 31, Year 1, Chapin Company had a $68,000 balance in its Accounts Receivable account and a zero balance in its Allowance for Doubtful Accounts account. Sales on account for Year 1 amounted to $320,000. Chapin estimates that 5 percent of credit sales will be uncollectible. Required a. Record the year-end adjusting entry for depreciation expense on the truck in T-accounts. b. Determine the book value of the truck that will appear on the December 31, Year 1, balance sheet. c. Record the year-end adjusting entry of uncollectible accounts expense. d. Determine the net realizable value of receivables that will appear on the December 31, Year 1, balance sheet.

Please refer to Explanation

Explanation:

a)

The truck was bought for $56,000 and has a 5 year useful value after which it will have a salvage value of $6,000.

Depreciation can therefore be calculated as,

= ( Cost - Salvage) / Useful life

= (56,000 - 6,000) / 5

= $10,000

It will be depreciated at $10,000 per year.

Recording it will be,

DR Depreciation $10,000

CR Accumulated Depreciation (Truck) $10,000

(To record Depreciation expense to the year)

b) The Book Value is calculated as the Original Cost less the Accumulated Depreciation.

The Accumulated Depreciation so far being the first year is only $10,000.

The Book Value therefore is,

= 56,000 - 10,000

= $46,000

c) It is estimated that 5% of Credit Sales will be Uncollectible. This will go into the Uncollectible Account Balance. This is done to cater for the possibility that some people will not pay the money they owe so if they don't, it is simply taken from this account.

Sales are $320,000 and 5% are estimated Uncollectible.

This means that,

= 320,000 * 5%

= $16,000 will be recorded in the Uncollectible Account Balance

Recording it looks like,

DR Uncollectible Account Expense $16,000

CR Allowance for Doubtful Accounts $16,000

(To record Uncollectible Account Expense)

d) The Net Realizable Value of the Receivables will be Receivables less the Uncollectible Account Expense which will be removed to reflect the belief that some debtors will default.

Receivables are $68,000 and the Uncollectible Amount is $ 16,000.

Net Realizable Value = 68,000 - 16,000

Net Realizable Value = $52,000

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