Question

8-2 Determining the Acquisition Cost and the Financial Statement Effects of Depreciation, Extraordinary Repairs, and Asset Disposal (AP8-1 LO8-1, 8-2, 8-3, 8-5 On January 2, 2015, Athol Company bought a machine for use in operations. The machine has estimated useful life of eight years and an estimated residual value of $2,600. The company provided the following information a. Invoice price of the machine, $82,000 b. Freight paid by the vendor per sales agreement, $1,000 c. Installation costs, $2,400 cash d Cost of cleaning up the supplies, boxes, and other garbage that remained after the installation of th machine, $100 cash. Payment of the machine's price was made as follows: January 2: e. Issued 2,000 common shares of Athol Company at $3.50 per Signed a $45,000 note payable due April 16, 2015, plus 8 perce if the cash payment is made by January 11 January 15: Paid the balance of the invoice price in cash. April 16 nierest . Balance of the invoice price to be paid in cash. The invoice allows for a 2 percent cash discount Paid the note payable and interest in cash. On June 30, 2017, the company completed the replacement of a major part of the machine that cost $18,575. This expenditure is expected to reduce the machine's operating costs, increase its estimated useful life by two years, and decrease its estimated residual value to $2,000 f g. Assume that on October 1, 2022, the company decided to replace the machine with a newer, more efficient model. It then sold the machine to Sako Ltd. on that date for $30,000 cash Required 1. Compute the acquisition cost of the machine, and explain the basis for including certain costs in the determination of the machine's acquisition cost. 2. Indicate the accounts affected, amounts, and direction (+ for increase and - for decrease) of the effects of the purchase and subsequent cash payments on the accounting equation. Use the following headings: Assets Liabilities Shareholders' Equity Date

Answer 1

1.

Invoice price of machine	Relevant	$ 82,000
Freight	Not relevant, as it was paid by vendor	-
Installation Cost	Relevant	2,400
Cost of cleaning up	Not to be capitalized, as it does not contribute to getting the asset ready for its intended use	-
Acquisition Cost as on January 2, 2015		84,400
Cost of Replacement of Part	Relevant, since it contributes to reduction in operating costs and increase in estimated useful life of machine	18,575
Acquisition cost as on June 30, 2017		$ 102,975

2.

Date	Assets		=	Liabilities		+	Shareholders' Equity
	Cash	Equipment		Accounts Payable	Note Payable		Share Capital	Retained Earnings
Jan 2 2015	- 100	84,400		32,400	45,000		7,000	- 100
Jan 15, 2015	-32,400			- 32,400
April 16, 2015	-46,050				- 45,000			- 1,050
June 30, 2017	-18,575	18,575
		$ 102,975			0		7,000