Question

Mercury Delivery Service completed the following transactions and events involving the purchase and operation of equipment for its business.

2016

Jan. 1 Paid \(25,860 cash plus \)1,810 in sales tax for a new delivery van that was estimated to have a five-year life and a \(3,670 salvage value. Van costs are recorded in the Equipment account.

3 Paid \)1,850 to install sorting racks in the van for more accurate and quicker delivery of packages. This increases the estimated salvage value of the van by another \(230.

Dec. 31 Recorded annual straight-line depreciation on the van.

2017

Jan. 1 Paid \)2,064 to overhaul the van’s engine, which increased the van’s estimated useful life by two years.

May 10 Paid $800 to repair the van after the driver backed it into a loading dock.

Dec. 31 Record annual straight-line depreciation on the van. (Round to the nearest dollar.)

Required Prepare journal entries to record these transactions and events.

Short answer

Depreciation in 2016 is $5,124

Depreciation in 2017 is $3,760

Step-by-step solution

Journal entries for 2016

Jan 1	Equipment	$27,670
	Cash		$27,670
	Record purchase of van ($25,860+$1,810)

Jan 3	Equipment	$1,850
	Cash		$1,850
	Record betterment of van

Dec 31	Depreciation	$5,124
	Accumulated depreciation- Van		$5,124
	Record depreciation

Note:

$\begin{array}{rcl}\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \frac{\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{r}\mathbf{e}\mathbf{v}\mathbf{i}\mathbf{s}\mathbf{e}\mathbf{d}\mathbf{}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}}{\mathbf{u}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}}\\ \cos t& =& \$27,670+\$1850=\$29,520\\ revisedsalvage& =& \$3,670+\$230=\$3,900\\ depreciation& =& \frac{\$29,520-\$3,900}{5}\\ \mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \frac{\mathbf{\$}\mathbf{25}\mathbf{,}\mathbf{620}}{\mathbf{5}}\mathbf{=}\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{124}\end{array}$

Journal entries for 2017

Jan 1	Equipment	$2,064
	Cash		$2,064
	Record extraordinary expense

May 10	Repairment expense	$800
	Cash		$800
	Record repairment of van

Dec 31	Depreciation	$3,760
	Accumulated depreciation- Van		$3,760
	Record of depreciation

Note:

$$\begin{gathered} \mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{r}\mathbf{e}\mathbf{v}\mathbf{i}\mathbf{s}\mathbf{e}\mathbf{d}\mathbf{}\mathbf{r}\mathbf{e}\mathbf{m}\mathbf{a}\mathbf{i}\mathbf{n}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{}\mathbf{u}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{}\mathbf{l}\mathbf{i}\mathbf{f}\mathbf{e}} \\ \cos t=\left(bookvalue-depreciation\right)+extraordinaryexpense \\ \cos t=\left(\$29,520-\$3,900-\$5,124\right)+\$2,064=\$22,560 \\ \mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{\$}\mathbf{22}\mathbf{,}\mathbf{560}}{\mathbf{6}}\mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{760} \end{gathered}$$