Question

On January 1, 2014, Jose Company purchased a building for $280,000 and a delivery truck for $36,000. The following expenditures have been incurred during 2016:

•	The building was painted at a cost of $7,500.
•	To prevent leaking, new windows were installed in the building at a cost of $9,700.
•	To improve production, a new conveyor system was installed in the building at a cost of $57,500.
•	The delivery truck was repainted with a new company logo at a cost of $1,000.
•	To allow better handling of large loads, a hydraulic lift system was installed on the truck at a cost of $7,500.
•	The truck’s engine was overhauled at a cost of $4,200.

	Required:
1.	Determine which of those costs should be capitalized. Also record the journal entry for the capitalized costs. Assume that all costs were incurred on January 1, 2016.
2.	Determine the amount of depreciation for the year 2016. The company uses the straight-line method and depreciates the building over 25 years and the truck over six years. Assume zero residual value for all assets. Prepare the journal entry to record depreciation for 2016.
3.	How would the assets appear on the balance sheet of December 31, 2016?

CHART OF ACCOUNTS Jose Company General Ledger ASSETS REVENUE 111 Cash 411 Sales Revenue 121 Accounts Receivable EXPENSES 141 Inventory 500 Cost of Goods Sold 152 Prepaid Insurance 521 Salaries and Wages Expense 154 Supplies 532 Utilities Expense 171 Building 533 Insurance Expense 172 Truck 534 Rent Expense 178 Accumulated Depreciation-Building 537 Supplies Expense 179 Accumulated Depreciation-Truck 541 Depreciation Expense LIABILITIES 551 Advertising Expense 211 Accounts Payable 559 Miscellaneous Expenses 810 Interest Expense 231 Salaries and Wages Payable 235 Notes Payable 910 Income Tax Expense 261 Income Taxes Payable EQUITY 311 Capital Stock 331 Retained Earnings

1b. Prepare the journal entry with the impact on the financial statements to record the capitalized costs on January 1.

general journal balance sheet income statement

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY	REVENUE	EXPENSES	NET INCOME
1
2
3

2b. Prepare the journal entry with the impact on the financial statements to record depreciation for 2016 on December 31.

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY	REVENUE	EXPENSES	NET INCOME
1
2
3

3. How would the assets appear on the balance sheet of December 31, 2016)

Jose Company

Balance Sheet (Partial)

1
2
3
4
5
6

Answer 1

1 & 2)
Total cost of building to capitalise = Cost price + expenses
280000 + 7500 +9700 + 57500 = 354700
Amount of depreciation on Straight line = Total Cost / Life years =
354700 / 25 = 14188 per annum
Total Cost of delivery truck to capitalise = Cost price + expenses
36000 + 1000 + 7500 + 4200 = 48700
Amount of depreciation on Straight line = Total Cost / Life years =
48700/6 = 8116.67 per annum
SL./Date	Acc. Title	Post Ref.	Debit	Credit	Assets	Liabilities	Equity	Revenue	Expenses	Net Income
1-Jan	Building	171	354700		354700
	Cash	111		354700	-354700
	(capitalisation of building)
1-Jan	Truck	172	48700		48700
	Cash	111		48700	-48700
	(capitalisation of Delivery Truck)
31-Dec	Depreciation Exp.	541	14188						14188
	Accumulated Dep.	178		14188		14188
	(depreciation expense on Building for 2016)
31-Dec	Depreciation Exp.	541	8116.67						8116.67
	Accumulated Dep.	179		8116.67		8116.67
	(depreciation expense on Delivery truck for 2016)
3) Balance Sheet (Partial):
	Assets:
	PPE:
	Building	354700
	Acc. Dep. - Building	-14188
	Delivery Truck	48700
	Acc. Dep. - Delivery Truck	-8116.67