Tower Company owned a service truck that was purchased at the beginning of 2018

Question

Tower Company owned a service truck that was purchased at the beginning of 2018 for $31,000. It had an estimated life of three years and an estimated salvage value of $4,000. Tower company uses straight-line depreciation. Its financial condition as of January 1, 2020, is shown in the following financial statements model Assets RevenueExpense Net Income Cash Flow Accumulated Retained Common Stock 9,000 Cash + Mach. 20,00031,000 -Depreciation +Earnings 18,000 24,000 NA NA NA NA In 2020, Tower Company spent the following amounts on the truck: Jan. 4 Overhauled the engine for $6,000. The estimated life was extended one additional year, and the salvage value was revised to $3,000. July 6 Obtained oil change and transmission service, $250. Aug. 7 Replaced the fan belt and battery, $350. Dec. 31 Purchased gasoline for the year, $7,500. 31 Recognized 2018 depreciation expense. Required a. Record the 2020 transactions in a statements model like the preceding one. (In the Cash Flow column, use the initials OA to designate operating activity, IA for investing activity, FA for financing activity, NC for net change and NA for not affected. Round your answers to the nearest dollar amount. Enter any decreases to account balances with a minus sign.) TOWER COMPANY Statements Model for 2020 Assets Stockholders' EquityRevenueExpenseNet IncomeCash Flow Accumulated Common Depreciation Retained Earnings Date Cash Mach Stock 18,000 = Balance 1/4 7/6 20,000H 31,000 9,000+ 24,000 NA 12/31 12/31 Total 20,000+ 31,000 18,000 = 9,000+ 24,000

Explanation / Answer

Workings:

Book value of truck on Jan. 1, 2020 = $31000 - $18000 = $13000

Overhauling expense of $6000 will be capitalized as it leads to an increase in the estimated life.

Revised book value = $13000 + $6000 = $19000

Revised remaining estimated life = 2 years

Revised salvage value = $3000

Revised depreciable cost = $19000 - $3000 = $16000

Depreciation for 2020 = $16000 / 2 years = $8000

TOWER COMPANY Statements Model for 2020 Assets = Stockholders' Equity Revenue - Expense = Net Income Cash Flow Date Cash + Mach. - Accumulated Depreciation = Common Stock + Retained Earnings - = Balance 20000 + 31000 - 18000 = 9000 + 24000 - = NA 1/4 -6000 + 6000 - = + - = -6000 IA 7/6 -250 + - = + -250 - 250 = -250 -250 OA 8/7 -350 + - = + -350 - 350 = -350 -350 OA 12/31 -7500 + - = + -7500 - 7500 = -7500 -7500 OA 12/31 + - 8000 = + -8000 - 8000 = -8000 NA Total 5900 + 37000 - 26000 = 9000 + 7900 - 16100 = -16100 -14100 NC

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