Question

E9-3 Determining Financic Statement Effects of an Asset Acquisition and Straight-Line Depreciation [LO 9-2, LO 9-3] O'Connor Company ordered a machine on January 1 at a purchase price of $60.000. On the date of delivery, January 2, the company pard $15,000 on the machine and signed a long-term note payable for the balance. On January 3, it paid $600 for freight on the machine. On January 5, O'Connor paid cash for installation costs relating to the machine amounting to $3,600. On December 31 (the end of the accounting period). O'Connor recorded depreciation on the machine using the straight-line method with an estimated useful life of 10 years and an estimated residual value of $6,400. Required: 1. Indicate the effects accounts, amounts, and for increase. - for decrease of each transaction on January 1, 2, 3, and 5) on the accounting equation 2. Compute the acquisition cost of the machine 3. Compute the depreciation expense to be reported for the first year 4. What should be the book value of the machine at the end of the second year? Complete this question by entering your answers in the tabs below. Required 2 Required 3 Required Indicate the acts (accounts, amounts and for increase - for decrease each transaction on January 1, 2, 3, and 5) on the accounting equation (inter d ec

Answer 1

1)

Date	Assets		=	Liabilities		+	Stockholders' Equity
Jan 1			=			+
Jan 2	Cash	-15000	=	Long term notes payable	$45000	+
	Machine	+60000
Jan 3	Cash	-600	=			+
	Machine	+600
Jan 5	Cash	-3600	=			+
	Machine	+3600

2) Total acquisition costs= $60000+600+3600= $64200

3) Depreciation expense= (Original cost-Residual value)/Estimated life of machine

= $(64200-6400)/10= $5780

4) Accumulated depreciation expense at the end of Year 2= $5780*2= $11560

Book value of the machine at the end of Year 2= $64200-11560= $52640

1-a) Straight-line method

Depreciation expense= (Original cost-Residual value)/Estimated life of machine

= $(42000-5000)/5= $7400

	Income Statement	Balance Sheet
Year	Depreciation Expense	Cost	Accumulated depreciation	Book Value
All acquisition				$42000
1	$7400	42000	7400	(42000-7400)= 34600
2	$7400	42000	(7400+7400)= 14800	(42000-14800)= 27200
3	$7400	42000	(14800+7400)= 22200	(42000-22200)= 19800
4	$7400	42000	(22200+7400)= 29600	(42000-29600)= 12400
5	$7400	42000	(22200+7400)= 37000	(42000-37000)= 5000

b) Units-of-production method

Depreciation expense= (Original cost-Residual value)/Estimated productive life of machine

= $(42000-5000)/20000= $1.85 per unit

	Income Statement	Balance Sheet
Year	Depreciation Expense	Cost	Accumulated depreciation	Book Value
All acquisition				$42000
1	(4500*$1.85)= 8325	$42000	8325	(42000-8325)= 33675
2	(5500*$1.85)= 10175	42000	(8325+10175)= 18500	(42000-18500)= 23500
3	(4500*$1.85)= 8325	42000	(18500+8325)= 26825	(42000-26825)= 15175
4	(4500*$1.85)= 8325	42000	(26825+8325)= 35150	(42000-35150)= 6850
5	(1000*$1.85)= 1850	42000	(35150+1850)= 37000	(42000-37000)= 5000

2-a) Straight-line method will result in the highest net income in Year 2 as the depreciation expense under straight line method in Year 2 is lower than the depreciation expense under Units-of-production method. As the depreciation expense under straight line method in Year 2 is lower the net income under straight line method will result higher in Year 2.

2-b) No, this higher net income does not mean the machine was used more efficiently under Straight-line method. As the difference in net income is just because of the different method used for calculating depreciation.