Question

Morris Inc. recorded the following transactions over the life of a piece of equipment purchased in Year 1 Jan. 1, Year 1 Purchased equipment for $90,000 cash. The equipment was estimated to have a five-year life and $5,000 salvage value and was to be depreciated using the straight-line method. Dec. 31, Year 1 Recorded depreciation expense for Year 1. Sept. 30, Year 2 Undertook routine repairs costing $900. Dec. 31, Year 2 Recorded depreciation expense for Year 2. Jan. 1, Year 3 Made an adjustment costing $2,500 to the equipment. It improved the quality of the output but did not affect the life and salvage value estimates. Dec. 31, Year 3 Recorded depreciation expense for Year 3. Jun. 1, Year 4 Incurred $850 cost to oil and clean the equipment. Dec. 31, Year 4 Recorded depreciation expense for Year 4. Jan. 1, Year 5 Had the equipment completely overhauled at a cost of $9,000. The overhaul was estimated to extend the total life to seven years. The salvage value did not changed Dec. 31, Year 5 Recorded depreciation expense for Year 5. Oct. 1, Year 6 Received and accepted an offer of $19,000 for the equipment Required a. Use a horizontal statements model like the following one to show the net effects of these transactions on the elements of the financial statements. The first event is recorded as an example. (Use + for increase or - for decrease. In the Cash Flow column indicate whether the item is an operating activity (OA), an investing activity (IA), or a financing activity (FA). Columns for events that have no effect on any of the elements should be left blank.) b. Determine the amount of depreciation expense to be reported on the income statements for the years Year 1 through Year 6. c. Determine the book value (cost-accumulated depreciation) Morris will report on the balance sheets at the end of the years Year 1 through Year 5. d. Determine the amount of the gain or loss Morris will report on the disposal of the equipment on October 1. Year 6.

Answer 1

Required B:-

Year	Depreciation Expense
Year 1	17,000
Year 2	17,000
Year 3	17833
Year 4	17,833
Year 5	8,945
Year 6	6,709

Required C:-

Equipment Account
Particulars	Amount	Particulars	Amount
Year 1
To, Cash	90,000	By Depreciation	17,000
		By, Balance c/f	73,000
Year 2
To, Balance b/d	73,000	By Depreciation	17,000
		By, Balance c/f	56,000
Year 3
To, Balance b/d	56,000	By Depreciation	17,833
To, cash a/c(adjustment)	2,500
		By, Balance c/f	40,667
Year 4
To, Balance b/d	40,667	By Depreciation	17,833
		By, Balance c/f	22,834
Year 5
To, Balance b/d	22,834	By Depreciation	8,945
To, cash a/c(0verhaul)	9,000
		By, Balance c/f	22,889
Year 6
To, Balance b/d	22,889	By Depreciation( 9 months)	6,709
To, Profit & loss a/c(gain on sale)	2,820	By cash(sale of asset)	19,000

Requirement D:- Gain on sale of equipment= 2,820