Crowe Company purchased a heavy-duty truck on July 1 2007, for 30,000 . It was estimated that i

Crowe Company purchased a heavy-duty truck on July 1 2007,...

Key Concepts

Straight?Line Depreciation

This method spreads an asset’s depreciable cost evenly over its useful life. In problems like the one above, it is used to compute the periodic depreciation expense and to determine the asset’s book value at any point in time by deducting the accumulated depreciation from the original cost.

Asset Disposal and Recognition of Loss

When an asset is retired or exchanged, its original cost and related accumulated depreciation are removed from the books. The difference between the asset’s carrying (book) value and the amount received on disposal is recognized as a gain or loss. In exchanges where the amount received is less than the book value, the entire difference is recorded as a loss in the period of disposal.

Nonmonetary Exchanges

A nonmonetary exchange occurs when an asset is traded for another asset rather than for cash. In such transactions, the new asset is recorded at its fair value (or the consideration given, if lower) and any difference between the book value of the disposed asset and the fair value of the asset received is recognized as a gain or loss, subject to special rules.

Exchanges Lacking Commercial Substance

In exchanges that lack commercial substance, future cash flows are not expected to change significantly. Under accounting rules, if an exchange lacks commercial substance, any realized gain may be deferred or limited, although losses must be recognized fully. This concept ensures that accounting entries reflect the economic underlying value changes in situations where the exchanged assets don’t substantially alter the entity’s risk profile.

Transcript

00:01 So, a career company purchased a heavy duty truck on july 1, 2007 for $30 ,000.

00:09 And, okay, so the price was $30 ,000.

00:17 And it was estimated that it would have a useful life of 10 years.

00:25 Then it would have a trading value of $6 ,000.

00:34 So the company uses the straight line method, and it was traded on august, the 4th ,000.

00:43 Of 2011 so that's when it was traded for a similar truck that was costing on 42 ,000 so it was traded for 42 ,000 dollars truck so 16 ,000 dollars was allowed as a trade in value and on the old truck so this was the trading value on the old truck and 26 ,000 was paid in cash.

01:32 Now a comparison of expected cash flows for the truck indicates that the exchange lacks commercial substance what is the entry to record the trade in so first you're going to be preparing the journal entry to record the trade in so journal entry to record the trade in so it's going to have the account title over here then we have the debit and the credit side okay, so the first thing we're going to be recording on the journal antich the new trucks because remember there are two trucks so the new truck was for the two dollars for two thousand dollars so that's it's to be a debit of forty two thousand dollars now the accumulator depreciation before we can know the accumulated depreciation we have to first find the accumulated depreciation so i'm gonna be finding it below so you're gonna have the accumulated depreciation as i august 11 2011 so first to solve the accumulated depreciation we need to know the purchase cost so the purchase cost is 30 ,000 because that's how much the the truck the ebitu truck cost at first so it's $30 ,000 now the salvage value is $6 ,000 because you are told that it has a trading value for 6 ,000 so that's the salvage value now the next thing we need to know is the depreciation depreciable value and it's basically difference between the purchase cost and the salvage cost the salvage value so that's the depreciable value are you going to have $24 ,000 right? so next thing we need to do is to the next thing we need to do is to divide the depreciation value by the useful life of the assets and according to the question the useful life of the assets in years is 10 years because it says that you have a useful life of 10 years and then trade it in so the useful life is 10 years so we divide this by 10 years and then you're going to have $2 ,400 and then this automatically becomes the depreciation per annum so per annum means per year so now to find a depreciation per month you basically divide it by 12 right because it's 12 months in a year so that means it's going to be 200 dollars when you find the deposition for months so that's that so now the deposition to july the deposition from july 1st of 2007 to july 1st of 2011 would be deposition from july 1st 2007 to july 1st of 2011 would be deposition from july 1st 2007 to july 1st 2011 would be basically multiplying or basically multiplying the 2 ,400 multiplied by four years.

06:57 So you multiply this by four...

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