91Ó°ÊÓ

Accounting for Plant Assets Ethan Corporation had the following transactions related to its delivery truck: Year 1 Jan. 5 Purchased for \(\$ 28,000\) cash a new truck with an estimated useful life of four years and a salvage value of \(\$ 4,000\). Feb. \(\quad 20\) Installed a new set of side-view mirrors at a cost of \(\$ 80\) cash. June \(\quad 9\) Paid \(\$ 325\) for an engine tune-up, wheel balancing, and a periodic chassis lubrication. Aug. 2 Paid a \(\$ 410\) repair bill for the uninsured portion of damages to the truck caused by Ethan's own driver. Dec. 31 Recorded depreciation on the truck for the year. Year 2 May 1 Installed a set of parts bins in the truck at a cost of \(\$ 950 \mathrm{cash}\). This expenditure was not expected to increase the salvage value of the truck. Dec. 31 Recorded depreciation on the truck for the year. Year 3 Dec. 31 Recorded depreciation on the truck for the year. Ethan's depreciation policies include (1) using straight-line depreciation, (2) recording depreciation to the nearest whole month, and (3) expensing all truck expenditures of \(\$ 100\) or less. Required Prepare journal entries to record these transactions and adjustments.

Step by step solution

01

Record Initial Truck Purchase

On January 5, Year 1, Ethan Corporation purchased a truck for \(28,000. This purchase is recorded by debiting the 'Trucks' account and crediting the 'Cash' account for \)28,000. No depreciation is calculated at this point.**Journal Entry:**\[\begin{align*}\text{Debit Trucks} & : \\(28,000 \\text{Credit Cash} & : \\)28,000\end{align*}\]

02

Record Installation of Side-View Mirrors

On February 20, Year 1, Ethan Corporation spent \(80 on side-view mirrors. Since this amount is \)100 or less, it is expensed rather than capitalized.**Journal Entry:**\[\begin{align*}\text{Debit Repairs and Maintenance Expense} & : \\(80 \\text{Credit Cash} & : \\)80\end{align*}\]

03

Record Routine Maintenance

On June 9, Year 1, Ethan Corporation paid \(325 for routine maintenance, which is expensed as it does not add to the truck's value.**Journal Entry:**\[\begin{align*}\text{Debit Repairs and Maintenance Expense} & : \\)325 \\text{Credit Cash} & : \$325\end{align*}\]

04

Record Repair Bill

On August 2, Year 1, the company paid \(410 for repairs. This is considered maintenance and is not capitalized.**Journal Entry:**\[\begin{align*}\text{Debit Repairs and Maintenance Expense} & : \\)410 \\text{Credit Cash} & : \$410\end{align*}\]

05

Calculate and Record Depreciation for Year 1

Depreciation is calculated using the straight-line method with an estimated useful life of 4 years and a salvage value of \(4,000. Depreciation expense is computed from January 5 (11 months of depreciation for Year 1).\[\text{Annual Depreciation} = \frac{\\)28,000 - \\(4,000}{4} = \\)6,000 \\text{Year 1 Depreciation (11 months)} = \frac{11}{12} \times \\(6,000 = \\)5,500\]**Journal Entry:**\[\begin{align*}\text{Debit Depreciation Expense} & : \\(5,500 \\text{Credit Accumulated Depreciation} & : \\)5,500\end{align*}\]

06

Record Installation of Parts Bins

On May 1, Year 2, the company installed parts bins at \(950. This amount is capitalized as it benefits future periods.**Journal Entry:**\[\begin{align*}\text{Debit Trucks} & : \\)950 \\text{Credit Cash} & : \$950\end{align*}\]

07

Calculate and Record Depreciation for Year 2

With parts bins added, re-calculate depreciation starting in May 1, Year 2.For 4 months (January-April):\[\text{Depreciation} = \frac{4}{12} \times \\(6,000 = \\)2,000\]For 8 months (May-December with parts bins): Adjust net book value to \(28,950:\[\text{New Annual Depreciation} = \frac{\\)28,950 - \\(4,000}{4} = \\)6,237.50 \\text{Eight Month Depreciation} = \frac{8}{12} \times \\(6,237.50 = \\)4,158.33\]Total Year 2 Depreciation = \(2,000 + \)4,158.33 = \(6,158.33**Journal Entry:**\[\begin{align*}\text{Debit Depreciation Expense} & : \\)6,158.33 \\text{Credit Accumulated Depreciation} & : \$6,158.33\end{align*}\]

08

Record Depreciation for Year 3

Calculate depreciation for Year 3 using the adjusted annual depreciation with parts bins.\[\text{Annual Depreciation} = \\(6,237.50\]**Journal Entry:**\[\begin{align*}\text{Debit Depreciation Expense} & : \\)6,237.50 \\text{Credit Accumulated Depreciation} & : \$6,237.50\end{align*}\]

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Journal Entries

Journal entries are fundamental accounting records. They document all financial transactions in a business. Each entry consists of a debit and a credit, ensuring the accounting equation (Assets = Liabilities + Equity) remains balanced. For plant assets, it's crucial to accurately journalize expenses and acquisitions.

When Ethan Corporation bought the delivery truck, the purchase was recorded by debiting the 'Trucks' account and crediting the 'Cash' account. This reflects the outflow of cash and the inflow of a truck as an asset. Recording such entries helps companies track increases and decreases in specific accounts.

• Debit side: Shows a value going into or increasing an account, especially assets.
• Credit side: Designates value going out of or decreasing an account, such as cash or liabilities.
• Accuracy: Journal entries must align with the actual economic event.

Understanding journal entries is key to ensuring that financial records accurately reflect business transactions.

Depreciation Calculation

Depreciation calculation is vital for understanding how a plant asset loses value over time. It reflects the wearing out of a long-term asset. Accounting for depreciation helps businesses allocate the cost of an asset over its useful life. This is necessary for matching expenses with revenue generated by the asset.

Ethan Corporation used straight-line depreciation, one of the simplest methods. To calculate, subtract the salvage value from the asset's cost and divide by its useful life. In Year 1, the truck's depreciation expense was calculated for 11 months since it was purchased in January.

• Cost of Asset: The original price paid for the asset, which was \(28,000 for Ethan's truck.
• Salvage Value: Expected resale value at the end of its life, which was \)4,000.
• Formula: \(\text{Depreciation Expense} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}}\)

This calculation helps allocate costs appropriately across years, ensuring financial statements reflect true economic conditions.

Straight-Line Depreciation

The straight-line depreciation method is praised for its simplicity and consistency. It spreads the depreciation evenly across the useful life of the asset. Each year, the same amount is deducted as an expense, making budgeting straightforward and predictable.

To implement straight-line depreciation, determine the annual depreciation expense using the formula \(\text{Annual Depreciation} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}}\). This systematic reduction helps portray a stable financial picture year over year. It is especially useful for assets like vehicles or machinery, providing a clear and understandable method of cost allocation.

• Consistency: Provides a uniform expense amount each year.
• Predictability: Facilitates financial planning and analysis.
• Simplicity: Easy to calculate and apply, reducing room for error.

Straight-line depreciation is ideal for assets that wear out evenly over time, giving an accurate reflection of an asset's consumption and aiding in financial stability.