Question

Champion Contractors completed the following transactions and events involving the purchase and operation of equipment in its business. 2016 1 Paid $270,000 cash plus $10,800 in sales tax and $1,600 in trans portation (FOB shipping point) for a new loader. The loader is estimated to have a four-year life and a $27, 000 salvage value. Loader costs are recorded in the Equipment account. 3 Paid $5,000 to enclose the cab and install air conditioning in the loader to enable operations under harsher conditions. This increas ed the estimated salvage value of the loader by another $1,500. Jan. Jan. Dec. 31 Recorded annual straight-line depreciation on the loader. 2017 1 Paid $4,200 to overhaul the loader's engine, which increased the loader's estimated useful life by two Jan. years. Feb. 17 Paid $1,050 to repair the loader after the operator backed it into a tree. Dec. 31 Recorded annual straight -line depreciation on the loader. Required: Prepare journal entries to record these transactions and events.

Answer 1

Journal entries:

Requirement 1:

Jan.1,2016	Equipment	$282,400
	Cash		$282,400
	[To record purchase of equipment]

Calculations:

Purchase price	$270,000
Sales tax	$10,800
Transportation	$1,600
Total cost to be recognized	$282,400

Requirement 2:

Equipment	$1,500
Equipment Expense	$3,500
Cash		$5,000

Explanation:

Expenses should be capitalized to the extent of 'Future economic benefits'

All other should be treated as normal expense

Requirement 3:

Dec.31,2016	Depreciation expense	$63,850
	Accumulated depreciation-equipment		$63,850
	[To record depreciation expense]

Calculation:

Depreciation expense = (Cost-Salvage value)/Useful life

=[(282,400+1,500)-(27,000+1,500)]/4

=[283,900-28,500]/4

=255,400/4

=$63,850

Requirement 4:

Jan.1,2017	Equipment	$4,200
	Cash		$4,200
	[Paid for Overhaul]

Capitalize the expense as it increases the 'future economic benefit'(increase in estimated useful life)

Requirement 5:

Feb.17,2017	Repairs expense	$1,050
	Cash		$1,050
	[Paid for repairs]

Requirement 6:

Dec.31,2017	Depreciation expense	$44,850
	Accumulated depreciation-equipment		$44,850
	[To record depreciation expense]

Calculations:

Cost	$283,900
Accumulated depreciation	($63,850)
Add: Overhaul cost	$4,200
Book value	$224,250
÷ Remaining useful life (3+2)	5 Years
Depreciation expense	$44,850