Question

On Jan 2, D&I Co. buys a $140,000 piece of equipment paying $40,000 down and signing a 4 year note for the remaining balance. On Jan 2 D&I paid $5,000 freight cost and $15,000 installation cost to get the equipment ready to be used. The useful life of the equipment is 10 years. The equipment has an estimated residual value of $10,000. D&I uses straight line depreciation. Required: 1. Prepare the journal entry or entries needed to record the equipment cost as of Jan 2. 2. Calculate the annual depreciation. Please use the space below the JEtable on the MSWord link file to show your calculation of annual depreciation. 3. Prepare the journal entry as of Dec 31 to record depreciation. 4. D&I Co. sold the piece of equipment on Dec 31 at the end of 6 years for $58,000 cash. Prepare the entry to record the sale of the equipment. Assume depreciation has been recorded through the sale date. Show your calculations for the disposal of the equipment below the JEtable on the MSWord link file. Use the MSWord link for the table to write your journal entries. After you have written the journal entries on the table in the MSWord document provided, type your name below the table on the document, save the document and then upload it to this problem in the upload space provided at the bottom of this box MSWord Journal Entry Form

Answer 1

Question 1

To record the cost of the equipment, cost includes the purchase price and costs which are incurred to bring the equipment in the condition of use. Therefore, we will need to include the freight cost and installation cost in the cost of equipment.

Total amount paid in cash will include the down payment, freight and installation cost.

Journal entry is below:

Credit ($) Journal entry in the books of D&I Co. Date Particulars Debit ($) 1st year 02-Jan Equipment A/C ------------- Dr 1,60,000 To, Cash A/C To, Notes payable A/C (Being equipment purchased and down payment made and notes payable signed for balance amount and freight and installation cost paid in cash) 60,000 1,00,000

Question 2

Depreciation is calculated on straight line basis.

Depreciation = (Cost of asset - Residual value)/Useful life of the asset

Depreciation = (160,000-10,000)/10 years

Depreciation = $15,000 p.a.

Question 3

Depreciation is an expense, so it is to be debited. The account credited will be accumulated depreciation. In this account, the depreciation of the each year will be credited and accumulated as it is provision.

Credit ($) Journal entry in the books of D&I Co. Date Particulars Debit ($) 1st year 31-Dec Depreciation A/C ------------- Dr 15,000 To, Accumulated Depreciation A/C (Being depreciation provided on straight line basis) 15,000

Question 4

Depreciation is provided for all 6 years. Total accumulated depreciation = $15,000*6 = $90,000

Therefore, the book value of the assets = $160,000-$90,000 = $70,000

The equipment is sold for $58,000 which is less than the book value of the asset. Therefore, there is loss on sale of equipment of $12,000 ($70,000-$58,000).

Journal entry is as below:

Credit ($) Journal entry in the books of D&I Co. Date Particulars Debit ($) 6th year 31-Dec Cash A/C ------------- Dr 58,000 Accumulated Depreciation A/C -------- Dr 90,000 Loss on sale of equipment A/C -------- Dr 12,000 To, Equipment A/c (Being equipment sold for cash) 1,60,000