Eagle Moving Company purchased a new moving van on October 1, 2011. The cash pri
ID: 2574638 • Letter: E
Question
Eagle Moving Company purchased a new moving van on October 1, 2011. The cash price w van was $33,750, and the company received a trade-in allowance of $5.600 for a record Update 2009 model. The balance was paid in cash. The 2009 model had been acquired on January , ass 2009, at a cost of $22,500. Depreciation has been recorded through December 31, 2010, on a straight-line basis, with three years of expected useful life and no expected salvage value. The exchange has no commercial substance. Prpare journal entries to update the depreciation and to record the exchange of the moving C vans.Explanation / Answer
Depreciation under straight line basis of old van
= (Purchase cost – Salvage value) / Useful life
= ($22,500 – 0) / 3
= $7,500 per year
Depreciation for 2009 and 2010
= $7,500 x 2
= $15,000
Depreciation till date of sale that is October 1, 2011 that is 9 months
= Yearly depreciation x Number of months / Total months in a year
= $7,500 x 9 / 12
= $ 5,625
So, Total accumulated depreciation
= Depreciation till 2010 + Depreciation till date of sale
= $15,000 + $5,625
= $ 20,625
Book value on date of sale
= Cost – Accumulated depreciation
= $22,500 - $ 20,625
= $ 1,875
Gain on sale of old van
= Trade-in-allowance – Book value
= $5,600 - $1,875
= $ 3,725
Cash paid for new van
= Cash price – Trade-in-value
= $33,750 - $5,600
= $28,150
Journal Entries
Depreciation on old van
Depreciation $5,625
Accumulated Depreciation $5,625
Sale of old van and acquisition of new van
Accumulated Depreciation $20,625
New Van $33,750
Old Van $22,500
Gain on Sale of old Van $3,725
Cash $28,150
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