Accumulated depreciation on a totaled vehicle and recording the transaction

[djain1985]

Hello,

I am trying to figure out how a totaled vehicle is recorded on the books. Supposing the vehicle was purchased in 2017 for $40,000. The accumulated depreciation for 2017 was $8,000. The vehicle was totaled in August 2018.

Q1. Would I prorate the accumulated depreciation for 2018 (Jan to Aug - $5333) or take the full $8000 for the year or only take it up till Dec 2017?

Q2. There is a $25,000 loan outstanding. The insurance company pays $22,000 DIRECTLY TO THE LENDER and $3,000 balance is paid out of pocket. What will be the journal entries to record the totaled vehicle on the books?

Dr. Loan Account - $25,000

Cr. Cash (Insurance Payment) - $22,000

Cr. Cash - $3,000

Dr. Cash (Insurance + out of pocket) - $25,000

Dr. Accumulated Depreciation - $13,333 (full 2017 + prorated for 2018?)

Dr. Loss on vehicle - $1,667

Cr. Vehicle Asset Account - $40,000

[Rustler]

You calculate partial year depreciation, you do not get it for the full year. Post the partial year depreciation to your accounts.

Assuming you have a fixed asset account for the vehicle, the accumulated depreciation, and the loan

Create an income account called gain/loss on asset

journal entries, the *** means use the balance in that account

debit gain/loss, credit fixed asset vehicle***
debit vehicle accumulated depreciation***, credit gain/loss
debit loan 22K, credit gain/loss

enter the payment for the loan from the bank, 3K, use the loan account as the expense for the payment

Be sure to make this transaction known to the tax accountant, tax treatment for this is weird.

[Malcolm Ziman]

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@djain1985 wrote:

Hello,

I am trying to figure out how a totaled vehicle is recorded on the books. Supposing the vehicle was purchased in 2017 for $40,000. The accumulated depreciation for 2017 was $8,000. The vehicle was totaled in August 2018.

Q1. Would I prorate the accumulated depreciation for 2018 (Jan to Aug - $5333) or take the full $8000 for the year or only take it up till Dec 2017?

Q2. There is a $25,000 loan outstanding. The insurance company pays $22,000 DIRECTLY TO THE LENDER and $3,000 balance is paid out of pocket. What will be the journal entries to record the totaled vehicle on the books?

Dr. Loan Account - $25,000

Cr. Cash (Insurance Payment) - $22,000

Cr. Cash - $3,000

Dr. Cash (Insurance + out of pocket) - $25,000

Dr. Accumulated Depreciation - $13,333 (full 2017 + prorated for 2018?)

Dr. Loss on vehicle - $1,667

Cr. Vehicle Asset Account - $40,000

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The entries for Cash are wrong. The 22k is in and out so no need to post. It is just the one line the 3k payment , so the the loss is 4667. 

This really s/be be recorded as an expense-type transaction, not a JE, for the 3k,  with a negative for the cost:

cost -40k

acc dep 13,333

loan 25k

loss 4,667

A separate JE s/be made: debit Dep, credit Acc Dep for 5333

So the total effect on the P&L is the sum of these 2 deductions i.e 10k

[djain1985]

Thanks for your response Rustler. I have noted the partial depreciation for year 2.

Couple quick questions.

1. Can you please list the JE with the amounts? I am getting a little confused. In the scenario presented, would the loss be $1,667 or $4,667?

2. Wouldn't the $3K balance payment on the vehicle be a balance sheet transaction (except for any interest component, which would appear on the P&L)?

Thanks!

[djain1985]

Thank you for your response! Couple quick clarifying questions:

1. Why is the cost recorded as a negative debit instead of a positive credit?

2. Should the JE's be the following?

Dr. Accummulated Depreciation - $13,333

Dr. Loan - $25,000

Dr. Loss on Sale of Vehicle - $4,667

Cr. Cost of Vehicle - $40,000

Cr. Cash - $3,000

[NRGKev]

I attempted this, however when I 'credit gain loss, and debit accumulated fixed asset depreciation fr the balance in the depreciation account'  then I end up with a positive balance equal to the above transaction amount in the account for the original vehicle asset account.  I'm guessing this is because I have my accumulated depreciation as a sub-account of the vehicle.   

Shouldn't I end up with $0 in the asset, accumulated depreciation, and bank loan accounts after all is said and done? 

Thanks in advance.   

[Rustler]

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@NRGKev wrote:

I attempted this, however when I 'credit gain loss, and debit accumulated fixed asset depreciation fr the balance in the depreciation account'  then I end up with a positive balance equal to the above transaction amount in the account for the original vehicle asset account.  I'm guessing this is because I have my accumulated depreciation as a sub-account of the vehicle.   

Shouldn't I end up with $0 in the asset, accumulated depreciation, and bank loan accounts after all is said and done? 

Thanks in advance.   

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Yes you should, having accumulated depreciation as a sub account is normal, the journal entry has to use that sub account, and the gain loss account, did it?

[NRGKev]

Yes it did.   I wonder...is the gain/loss supposed to be a sub-account of the vehicle to which it applies?   That seems like it might resolve the issue.   

[aliciam101]

I am entering end of year items and have a truck that was totaled by our insurance company.

To make a journal entry and deduct the portion the insurance company paid I would need to create an account for the insurance company (same as bank account-income) ?

Thank you for your help:)

Alicia