Question

2. HEMI paid $10,000,000 for equipment to crate its inventory for shipping. This amount has been recorded in the Equipment general ledger account. This equipment is expected to be useful for 500,000 crates at which point it will be taken to a recycling depot. In 2019, the equipment was used to create50,000 crates.  Accountant wants you to recommend, with justification, the appropriate depreciation method for the equipment. Compute the depreciation expense for the year-ended December 31, 2019 showing your calculations. Provide a depreciation expense adjusting journal entry.

3. Accountant meticulously calculated that $3,000,000 of advertising and promotion costs were spent to build customer loyalty.  This amount has been recorded in the Goodwill general ledger account. Accountant wants you to recommend, with justification, the appropriate accounting treatment for costs incurred to build customer loyalty. Provide an adjusting journal entry, if any, to properly account for costs incurred to build customer loyalty.

Answer 1

Adjusting cum Rectification Entries: 2) As it is given that equipment is to crate its inventory for shipping, the appropriate method for depreciating this equipment will be the units-of-production method so that the equipment will be depreciated over its economic life based on quantum of crates created each year. That is, [Depreciable cost Expected units to be produced] x Actual units produced Under units-of-production method, Depreciation expense $10,000,000 $0 Cost of the equipment Less: Residual value $10,000,000 Depreciable cost 500,000 $20 [$10000000 500000 crates] Expected crates to be created Depreciation expense per crate #of crates created this year 50,000 $1,000,000 Depreciation expense this year [$20 x 50000 crates] Journal entry should be: Account Title and Explanation Debit Credit Date $1,000,000 Dsec. 31, Depreciation Expense - Equipment Accumulated Depreciation Equipment $1,000,000 2019

Though $3,000,000 was spent on building customer loyalty, it is just an advertising and promotion costs and so advertising expense should 3) have been debited while recording this transaction instead of goodwill account. Therefore, it should be rectified by reversing or crediting the goodwill account which was incorrectly debited initially. Corresponding debit shall be given to advertising expense account which is the right account to be debited for recording this transaction Rectification journal entry should be: Account Title and Explanation Debit Credit Date Dsec. 31, Advertising expense $3,000,000 $3,000,000 Goodwill 2019