J Farms purchased three new tractors for $25,000 each. J expects the tractors to

Question

J Farms purchased three new tractors for $25,000 each. J expects the tractors to have a usefulfd life of 6 years and a residual value of $5,000. One of the tractors has not performed as expected, so J sold the tractor after 2 years for $18,000. J sold the remaining tractors for $5,000 at the end of the 6 years. J group uses group depreciation on a straight-line basis.

Required:

a. Prepare the journal entry for the purchase.

b. Prepare the journal entry for the first and second years depreciation.

c. Record the journal entry for the disposal of the tractor.

d. Record the journal entry for the third years depreciation.

Explanation / Answer

Journal Entries in the books of J Farms

Salvage Value = $5000*3 = $15000

Depreciation as per Straight line method =

[Asset cost - Salvage value]/3

Depreciation

($75000 - $15000)/3

Note 1 - Depreciation Calculation

Depreciable Value

Depreciation cost

Number Accounts Title Debit Credit (a) Tractors ($25000*3) $75000 Cash $75000 (Truck purchased recorded as asset) (b) First and Second year same entry

Depreciation

($75000 - $15000)/3

$10000 Accumulated Depreciation $10000 (Depreciation expenses charged on tractors) (c) Cash $18000 Accumulated Depreciation $7000 Tractors $25000 (Tractors sold for @ $18000) (d) Depreciation (Note 1) $6667 Accumulated depreciation $6667 (Depreciation charged on tractors for 3rd Year)

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