Question

Required information E8-4 (Static) Determining Financial Statement Effects of an Asset Acquisition and Depreciation (Straight- Line Depreciation) LO8-2, 8-3 The following information applies to the questions displayed below.) During Year 1, Ashkar Company ordered a machine on January 1 at an invoice price of $21,000. On the date of delivery January 2, the company paid $6,000 on the machine, with the balance on credit at 10 percent interest due in six months. On January 3, it paid $1,000 for freight on the machine. On January 5, Ashkar paid installation costs relating to the machine amounting to $2.500. On July 1, the company paid the balance due on the machine plus the interest. On December 31 (the end of the accounting period), Ashkar recorded depreciation on the machine using the straight-line method with an estimated useful life of 10 years and an estimated residual value of $3,000. E8-4 Part 2 2. Compute the acquisition cost of the machine. Acquisition Cost of the Machine Acquisition Cost of the Machine Freight costs Installation costs Acquisition cost s Interest expense Invoice cost 3. Compute the depreciation expense to be reported for Year 1. Depreciation expense 5. What would be the net book value of the machine at the end of Year 2? (Amounts to be deducted should be indicated by a minus sign.) Net book value of machine at end of Year 2 Net book value at end of year 2 $

Answer 1

1. Acquisition cost of the machine

Purchase Price 21,000

Freight 1,000

Installation cost 2,500

Interest expenses 750

Acquisition cost   25,250

Interest Expenses = (21000-6000) * 10% *6/12 = $750

(It has been assumed that the interest rate of 10% mentioned in the question is per annum)

2. Depreciation expense for year 1

(25250-3000) / 10years = $2225

3. Book value of asset at the end of year 2

Opening value (25250-2225)    23025

Less: Depreciation for year 2 (2225)

Closing value 20800