Question

Four years ago, on January 1, California Creamery bought a new delivery truck for $30,000. The company planned to use the truck for 7 years, and then sell it for $2,000. The company used the truck for 4 years and properly recorded straight-line depreciation each year. At the beginning of the 5th year, a change in emissions standards made the truck illegal in California. The company expects to sell the truck outside of California later this year for $6.000. The company should record a journal entry that includes a(n) (Check all that apply) $8,000 debit to Depreciation Expense scetu 0 ipd $8,000 debit to Impairment Loss $22,000 debit to Impairment Loss $8.000 credit to Truck $22.000 credit to Truck

Answer 1

Answer:

The company should record a journal entry that includes: Debit to Impairment Loss $8,000

Explanation:

The company uses straight-line depreciation, Depreciation Expense each year is calculated by following formula:  

Depreciation Expense = (Cost of delivery truck − Residual Value )/Useful Life  = ($30,000 - $2,000)/7 = $4,000

At the end of year 4, Accumulated depreciation = $4,000 x 4 = $16,000

At the end of year 4, Book value of the truck = $30,000 - $16,000 = $14,000

The company expects to sell the truck for $6,000 < Book value of the truck

California Creamery should record Impairment Loss for $14,000-$6,000=$8,000

The journal entry includes:

Debit to Impairment Loss $8,000