I continue getting the wrong totals can you please help me solve this problem and give me the correct formula and Journal entries.
On Jan 1 2004 Brown Airways purchased an airplane for 34,450,000. Brown airways expect the plane to remain useful for 6 years and have a residual value of 2,650,000. Brown Airways uses the straight line method to depreciate its airplanes. Brown Airways flew the plane for 3 years and sold it on Jan 1, 2007 for 8,400,000.
Compute accumulated depreciation on the airplane at Jan 1, 2007 (same as Dec 31, 2006) and record sale of the plane on Jan 1, 2007.
To solve this problem, we need to calculate the accumulated depreciation on the airplane at Jan 1, 2007 (or Dec 31, 2006) and record the sale of the plane on Jan 1, 2007.
1. Start by calculating the annual depreciation expense using the straight-line method:
Annual Depreciation Expense = (Cost - Residual Value) / Useful Life
Annual Depreciation Expense = ($34,450,000 - $2,650,000) / 6 years
Annual Depreciation Expense = $5,600,000
2. Next, calculate the accumulated depreciation for the 3 years from 2004 to 2006:
Accumulated Depreciation = Annual Depreciation Expense * Number of years
Accumulated Depreciation = $5,600,000 * 3 years
Accumulated Depreciation = $16,800,000
Therefore, the accumulated depreciation on the airplane at Jan 1, 2007 (or Dec 31, 2006) is $16,800,000.
3. Finally, record the sale of the airplane on Jan 1, 2007:
Journal Entry:
Jan 1, 2007
Debit: Accumulated Depreciation - Airplane $16,800,000
Debit: Cash $8,400,000
Credit: Airplane $34,450,000
Credit: Gain on Sale of Airplane $5,150,000
Explanation of Journal Entry:
- The debit to Accumulated Depreciation reflects the amount of depreciation recorded up to the sale date.
- The debit to Cash reflects the cash received from the sale of the airplane.
- The credit to Airplane represents the original cost of the airplane.
- The credit to Gain on Sale of Airplane represents the difference between the cash received and the net book value of the airplane (Cost - Accumulated Depreciation).
Please note that it's always a good practice to consult with an accountant or financial professional to ensure the accuracy of your financial statements and journal entries.