Graham Freightway provides freight service. The company's balance sheet includes Land, Buildings, and Motor-Carrier Equipment. Graham Freightway uses a separate accumulated depreciation account for each depreciable asset. During 2012, Graham Freightway completed the following transactions: Jan 1 âTraded in motor-carrier equipment with accumulated depreciation of $92,000 (cost of $131,000) for new equipment with a cash cost of $173,000. Graham Freightway received a trade-in allowance of $63,000 on the old equipment and paid the remainder in cash.

Jul 1 Sold a building that cost $580,000 and had accumulated depreciation of $280,000 through December 31 of the preceding year. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of $40,000. Graham Freightway received $90,000 cash and a $590,000 note receivable.

Oct 31 Purchased land and a building for a cash payment of $600,000. An independent appraisal valued the land at
$234,600 and the building at $455,400.

Dec 31 Recorded depreciation as follows: New motor-carrier equipment has an expected useful life of 1 million miles and an estimated residual value of $23,000. Depreciation method is the units-of-production method. During the year, Graham Freightway drove the truck 160,000 miles.

Depreciation on buildings is straight-line. The new building has a 40-year useful life and a residual value equal to $40,000.

Required:
Record the transactions in Graham Freightway's journal.

Graham Freightway

Journal Entries:

Jan. 1:

Debit New Motor-carrier Equipment $236,000

Debit Accumulated Depreciation $92,000

Credit Old Motor-carrier Equipment $131,000

Credit Cash Account $173,000

Credit Gain on Equipment Disposal $24,000

To record the trade-in of old equipment for a new one.

July 1:

Debit Cash Account $90,000

Debit Note Receivable $590,000

Debit Accumulated Depreciation 286,750

Credit Building $580,000

Credit Gain on Building Disposal $386,750

To record the sale of building.

Oct. 31:

Debit Land $204,000

Debit Building $396,000

Credit Cash Account $600,000

To record the purchase of land and building for cash.

Dec. 31:

Depreciation Expense on New Motor-carrier Equipment $34,080

Credit Accumulated Depreciation on Equipment $34,080

To record the depreciation expense for the year.

Dec. 31:

Depreciation Expense on Building $2,225

Credit Accumulated Depreciation on Building $2,225

To record the depreciation expense for the 3 months.

Explanation:

a) Data and Calculations:

1. Gain on Equipment of $24,000 is based on the difference between the net book value of the equipment and the trade-in cost.

2. The same is also applicable on the Building.

3. Allocation of the purchased cost of $600,000:

Land = 234,600/690,000 * $600,000 = $204,000

Building = 455,600/690,000 * $600,000 = $396,000

4. Depreciation on New Motor-carrier equipment:

Depreciable amount = $213,000 ($236,000 - 23,000)

Useful life = 1 million miles

Estimated residual value = $23,000

Depreciation rate = $213,000/ 1 million = $0.213

1st year depreciation = $0.213 * 160,000 = $34,080

5. Depreciation on Building:

Depreciable amount = $356,000 ($396,000 - 40,000)

Useful life = 40 years

Estimated residual value = $40,000

Depreciation rate = $8,900 ($356,000/40)

For three months, depreciation expense = $8,900/12 * 3 = $2,225