Question

E8-4 Determining Financial Statement Effects of an Asset Acquisition and Depreciation (Straight-Line Depreciation) LO8-2, 8-3 [The following information applies to the questions displayed below.] During Year 1, Ashkar Company ordered a machine on January 1 at an invoice price of $27,000. On the date of delivery, January 2, the company paid $7,000 on the machine, with the balance on credit at 9 percent interest due in six months. On January 3, it paid $1,100 for freight on the machine. On January 5, Ashkar paid installation costs relating to the machine amounting to $2,900. On July 1, the company paid the balance due on the machine plus the interest. On December 31 (the end of the accounting period), Ashkar recorded depreciation on the machine using the straight-line method with an estimated useful life of 10 years and an estimated residual value of $4,800.

Answer 1

	2	Acquisition Cost of the Machine
	a	Invoice Price	$27,000
	b	Freight	$1,100
	c	Installation Cost	$2,900
	d=a+b+c	Acquisition Cost	$31,000
	3	Depreciation expense to be reported in Year1
		Depreciation starts when the machine is placed in service
		In this case depreciation begins on January5
		Hence , full years depreciation will be allowed
		Acquisition cost	$31,000
		Residual value	$4,800
		Useful Life in years	10
		Annual Depreciation=(Acquisition Cost-Residual Value)/(Useful Life)
		Depreciation expense	$2,620	(31000-4800)/10
			A	B	C=31000-B
	5	Year	Depreciation expense	Accumulated Depreciation	Book Value at end of Year
		1	$2,620	$2,620	$28,380
		2	$2,620	$5,240	$25,760
		Net book value at end of Year2	$25,760