[RYK]

I have a homework question.

Company purchased vehicle for $24,000 cash in 2004. When the car was put in service it's expected life was 120,000 miles with an expected salvage value of $8,400. The company sold the vehicle to an outside buyer @ $10,500. Company depreciates its cars using Units of Production. The vehicle was driven 56,000 miles the first two years, and has been driven 25,000 miles in 2007.

The first entry I made was the sale of the vehicle:
debit cash: $10,500
credit company car: $10,500

Depreciation vehicle to day of trade: (here's my problem)

This is what I have done:
120,000/8400 = .07

then I took the first two years mileage:
56,000*.07 = $3,920

miles driven 2007:
25,000*.07= $1,750

Okay my question is do I only post the miles driven in 2007 for $1,750 or do I need to post the total miles for the 3 years for $5,670.

I posted:
debit Depreciation $5,670
credit Accumulated Depreciation: $5,670.

Someone please help. I thought depreciation was recorded yearly and I would only have to record the miles for 2007, but not sure!

Thanks :)

[morgaine300]

Well, to start with, you can't record the sale first because it didn't happen first. Second, it's not correct, as you have not accounted for the cost, the accumulated depreciation, book value, gain or loss... you have just recorded taking 10,500 out of the auto account (what are you going to do with what's left in that account?) and then put it into cash.

As for the depreciation, it's not 120,000/8400. The 8400 is salvage. That means an amount that will never get depreciated. That is, 8400 of the 24,000 cost will never be depreciated. So it needs removed to get the amount you actually will depreciate, called depreciable cost. It's then depreciable cost divided by the miles to get an amount per mile.

And I can't answer what you make journal entries for because you didn't give me any instructions. Does it want you to jouralize everything here? Or does it only want you to journalize the entries for 2007? If the later, then the depreciation for the other two years has already been recorded. When the car is sold, you only need to catch up the current depreciation so it's to-date.

And then you can record the sale, but not until. You must remove the entire cost of the asset, not just what someone else paid for it. (Again, what are you going to do with that amount left behind?) And you must remove all of the accumulated depreciation. Depreciation has to go with it -- it doesn't stay on the books. Then you have to compare the selling price to the book value at the time of the sale to get a gain or loss.

[RYK]

Thanks, I realized I did the formula wrong for the depreciation.

Here is the solution:
Pleasant Breeze owns three company cars, with one car replaced every three years always during December. The 2004 Toyota Camry is replaced today with a 2007 Honda Accord. The company paid $28,000 for the Honda. Pleasant Breeze pays 10% down and signs a five year, 3% note for the balance with Honda credit.
The Toyota was purchased for $24000 cash in 2004. When the car was put in service its expected life was 120,000 miles with an expected salvage value of $8400. The company sold the Toyota to an outside buyer at $10500. The company depreciates its cars using Units of Production. The Camry was driven 56000 miles the first two years, and has been driven 25000 miles in 2007.

First Transaction was to depreciate toyota to day of trade
So this is what I did: 24,000-8,400 =15,600/120,000 miles = .13
.13 * 56,000 (first two years) = $7,280
.13 * $25,000 (2007)= $3,250

Debit Depreciation Expense $7,280
Credit Accumulated Depreciate $7,280

Next Transaction: Record sale of Toyota
Cash recv'd from sale: 10,500
Book value asset sold
cost 24,000
Less Acc Dep (10,530)
Gain/Loss on Sale 13,470
Loss (2,970)

This was my entry:
Debit Cash 10,500
Debit Accum Dep 10,530
Credit Company Car 24,000
Debit Loss on Sale 2,970

Please let me know if I'm on the right track and thank you so much for your help:-)

[morgaine300]

You'r fine except that you're still trying to record depreciation from prior years. You need to record the depreciation for 2007.

Everything else is fine.