Question

Chem-Lite, Inc., maintains its accounts on the basis of a fiscal year ending March 31. At March 31, 20X1, the Equipment account in the general ledger appeared as shown below. The company uses straight-line depreciation, a 10-year life, and 10 percent salvage value for all its equipment. It is the company's policy to take a full year's depreciation on all additions to equipment occurring during the fiscal year, and you may treat this policy as a satisfactory one for the purpose of this problem. The company has recorded depreciation for the fiscal year ended March 31, 20X1. Equipment 4/1/XO Bal. forward 12/1/X0 1/2/X1 2/1/X1 3/1/X1 130,000 10,800 1,048 1,048 1,648 Upon further investigation, you find the following contract dated December 1, 20X0, covering the acquisition of equipment: List price 5% sales tax Total Down payment Balance 9% interest, 24 months Contract amount $36,000 1,800 $37,800 10,800 27,000 4,860 $31,860 Required: Prepare the adjusting entries you would propose as auditor of Chem-Lite, Inc., with respect to the equipment and related depreciation accounts at March 31, 20X1. (Assume that all amounts given are material.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your intermediate computations to the nearest whole dollar value.)

Answer 1

Adjusting entry 1

Transaction	General journal	debit	credit
1	Equipment	23856
	Deferred interest	4050
	Interest expenses	810
	Contract payable		28716

Working Note:

Equipment = Price - depreciation = 37800 - 10800 - 1048 - 1048 - 1048 = 23856

Deferred interest = interest * 20 / 24 = 4860 * 20 / 24 = 4050

Interest expense = interest * 4 / 24 = 4860 * 4/24 = 810

contract payable = equipment + deferred interest + interest expense = 23856 + 4050 + 810 = 28716

Adjusting entry 2

Transaction	General journal	debit	credit
2	Depreciation expense (equipment)	2165
	Accumulated depreciation		2165

Working Note:

Depreciation correct amount = [ Price - salvage ] * 10/100 = [ 37800 - 3780 ] *10/100 = 3420

Depreciation amount taken = 10800 + 1048 + 1048 + 1048 = [13944 - 1394 ] *10/100 = 1255

Adjusting amount = Depreciation correct amount - Depreciation amount taken = 3420 - 1255 = 2165