On July 1, 2016, Farm Fresh Industries purchased a specialized delivery truck for $264,000. At the time, Farm Fresh estimated the truck to have a useful life of eight years and a residual value of $24,000. On March 1, 2021, the truck was sold for $115,000. Farm Fresh uses the straight-line depreciation method for all of its plant and equipment. Partial-year depreciation is calculated based on the number of months the asset is in service. Required: 1. Prepare the journal entry to update depreciation in 2021 2. Prepare the journal entry to record the sale of the truck. 3. Assuming that the truck was instead sold for $141,000, prepare the journal entry to record the sale.

1.

1 March 2021    

Depreciation expense                                          $5000 Dr

       Accumulated depreciation-Delivery truck             $5000 Cr

2.

1 March 2021

Accumulated depreciation-Delivery truck          140000 Dr

Cash                                                                          115000 Dr

Loss on Disposal                                                      9000 Dr

             Delivery Truck                                                   264000 Cr

3.

1 March 2021

Accumulated depreciation-Delivery truck          140000 Dr

Cash                                                                          141000 Dr

             Delivery Truck                                                   264000 Cr

             Gain on disposal                                                  17000 Cr

Explanation:

1.

Depreciation expense is the systematic allocation of an asset's cost over its estimated useful life.

The straight line method of depreciation charges a constant depreciation expense each period. The formula for depreciation expense per period under this method is,

Depreciation expense = (Cost - Residual value)  /  Estimated useful life of the asset

The depreciation expense per year of delivery truck under this method will be,

Depreciation expense per year =  (264000 - 24000) / 8 = $30000 per year

The depreciation expense to be charged in 2021 will be for 2 months.

Depreciation expense 2021 = 30000 * 2/12    = $5000

2.

The accumulated depreciation of truck on 1 March 2021 is,

Depreciation for 6 months of 2016 = 30000 * 6/12 = $15000

Depreciation for 4 years (2017 to 2020) = 30000 * 4 = $120000

Depreciation for 2 months of 2021 = $5000

Accumulated depreciation at 1 March 2021 = 15000 + 120000 + 5000

Accumulated depreciation at 1 March 2021 = $140000

Net Carrying value of asset = 264000 - 140000 = $124000

Loss on disposal as asset is sold for less than its carrying value is,

loss on disposal = 115000 - 124000   = - $9000 (loss on disposal)

3.

As the asset is sold for more than its carrying value, the gain on disposal is,

Gain on disposal = 141000 - 124000    = $17000 (gain on disposal)

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