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Great Adventures Problem
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Tony and Suzie see the need for a rugged all-terrain vehicle to transport participants and supplies. They decide to purchase a used Suburban on July 1, 2022, for $13,200. They expect to use the Suburban for five years and then sell the vehicle for $5,100. The following expenditures related to the vehicle were also made on July 1, 2022:
The company pays $2,100 to GEICO for a one-year insurance policy.
The company spends an extra $4,200 to repaint the vehicle, placing the Great Adventures logo on the front hood, back, and both sides.
An additional $2,300 is spent on a deluxe roof rack and a trailer hitch.
The painting, roof rack, and hitch are all expected to increase the future benefits of the vehicle for Great Adventures. In addition, on October 22, 2022, the company pays $1,000 for basic vehicle maintenance related to changing the oil, replacing the windshield wipers, rotating the tires, and inserting a new air filter.
Required:
Record the depreciation expense and any other adjustments related to the vehicle on December 31, 2022.

Answer 1

Answer:

book value = $13,200 (purchase price) + $4,200 (paint) + $2,300 (accessories) = $19,700

useful life 5 years, salvage value $5,100

assuming the company uses straight line depreciation:

depreciation per year = ($19,700 - $5,100) / 5 years = $2,920 per year

the journal entries to record the purchase of the vehicle and the improvements are:

July 1, 2022, vehicle is purchased

Dr Suburban SUV 13,200

    Cr Cash 13,200

July 1, 2022, vehicle's paint and accessories

Dr Suburban SUV 6,500

    Cr Cash 6,500

the journal entry to record depreciation expense ($2,920 x 6 months)

December 31, 2022, depreciation expense

Dr Depreciation expense 1,460

    Cr Accumulated depreciation - Suburban SUV 1,460

the journal entry to record insurance expense ($2,100 x 6 months)

December 31, 2022, insurance expense

Dr Insurance expense 1,050

    Cr Prepaid insurance 1,050

Answer 2

Depreciation

1) The depreciation expense is :

Book Value =  Purchase price + Paint + Accessories

Book Value = $13,200+ $4,200  + $2,300

Book Value = $19,700

Selling Value after 5 years = $5,100

Assuming :

Straight Line Depreciation:

Depreciation per year = (Book Value-Selling Value )/5 Years

Depreciation per year = ($19,700 - $5,100) / 5 years

Depreciation per year = $2,920 per year

The journal entries to record the purchase of the vehicle and the improvements are:

• July 1, 2022, vehicle is purchased

Dr Suburban SUV          $13,200

      Cr Cash                                       $13,200

• July 1, 2022, vehicle's paint and accessories

Dr Suburban SUV                $6,500

    Cr Cash                                              $6,500

• Journal entry to record depreciation expense ($2,920 x 6 months)

December 31, 2022,

Dr Depreciation expense                                          $1,460

   Cr Accumulated depreciation - Suburban SUV                  $1,460

• Record insurance expense ($2,100 x 6 months)

Dr Insurance expense                         $1,050

       Cr Prepaid insurance                                               $1,050

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