On july 1, 2013, farm fresh industries purchased a specialized delivery truck for $126,000. at the time, farm fresh estimated the truck to have a useful life of eight years and a residual value of $30,000.
on march 1, 2018, the truck was sold for $58,000.
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 2018.
2. prepare the journal entry to record the sale of the truck.
3. assuming that the truck was sold for $80,000, prepare the journal entry to record the sale.

1.

Debit Depreciation Expense $2,000

Credit Accumulated depreciation $2,000

2.

Debit Cash $58,000

Debit Accumulated depreciation account $56,000

Debit Loss on asset disposal   $12,000

Credit Delivery truck asset $126,000

3.

Debit Cash $80,000

Debit Accumulated depreciation account $56,000

Credit Gain on asset disposal  $10,000

Credit Delivery truck asset $126,000

Explanation:

Farm Fresh uses straight-line depreciation, Depreciation Expense each year is calculated by following formula:

Annual Depreciation Expense = (Cost of asset − Residual Value )/Useful Life = ($126,000-$30,000)/8 = $12,000

Depreciation Expense in 2013 = ($12,000/12)x6 = $6,000

1. From January 1, 2018 to March 1, 2018, the truck was in service  for 2 months

Depreciation Expense in 2018 = ($12,000/12)x2 = $2,000

The entry:

Debit Depreciation Expense $2,000

Credit Accumulated depreciation $2,000

2.

From July 1, 2013 to March 1, 2018, the truck was in service for 4years and 8 months

Accumulated depreciation = $6,000 + $12,000 x 4 + $2,000 = $56,000

Carrying amount of the asset  = Cost of asset - Accumulated depreciation = $126,000 - $56,000 = $70,000

Sale price - Carrying amount of the asset  = $58,000-$70,000 = -$12,000

The company recognized loss on the sale $12,000.

The entry:

Debit Cash $58,000

Debit Accumulated depreciation account $56,000

Debit Loss on asset disposal   $12,000

Credit Delivery truck asset $126,000

3.

Sale price - Carrying amount of the asset  = $80,000-$70,000 = $10,000

The company recognized gain on the sale $10,000

The entry:

Debit Cash $80,000

Debit Accumulated depreciation account $56,000

Credit Gain on asset disposal  $10,000

Credit Delivery truck asset $126,000