Question

Exercise 218 Mark's Repair Service uses the straight-line method of depreciation. The company's fiscal year end is December 31. The following transactions and events occur years. 2016 July 1 Purchased equipment from the Equipment Center for $5,500 cash plus sales tax of $305, and shipping costs of $250. Nov. 3 Incurred ordinary repairs on computer of $240. Dec. 31 Recorded 2016 depreciation on the basis of a four-year life and estimated salvage value of $455. 2017 Dec. 31 Recorded 2017 depreciation. 2018 Jan. 1 Paid $1,800 for a major upgrade of the equipment. This expenditure is expected to increase the operating efficiency and capacity of the equip Identify the accounts to be increased/decreased and the amount of the increase/decrease. Date Account Titles Increase/Decrease Amount 2016 July 1 A A 2016 Nov. 3 A A 2016 Dec. 31 A 2017 Dec. 31 A A

Answer 1

Date	Account Titles	Increase/Decrease	Amount
2016, July 1	Equipment	Increase	$6,055
	Cash	Decrease	$6,055
2016, Nov. 3	Repair expense	Increase	$240
	Cash	Decrease	$240
2016, Dec. 31	Depreciation expense	Increase	$700
	Accumulated depreciation - equipment	Decrease	$700
2017, Dec. 31	Depreciation expense	Increase	$1,400
	Accumulated depreciation - equipment	Decrease	$1,400
2018, Jan. 1	Equipment	Increase	$1,800
	Cash	Decrease	$1,800

Cost of equipment = Cash purchase price + Sales tax + Shipping cost

= 5,500+305+250

= $6,055

Annual depreciation = (Cost of equipment - Salvage value)/ useful life

= (6,055-455)/4

= $1,400

Depreciation expense for 2016 = Annual depreciation x 6/12

= 1,400 x 6/12

= $700

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