Question

Brown Company paid cash to purchase the assets of Coffee Company on January 1, 2019. Information is as follows: Total cash paid $2,990,000 Assets acquired: Land $600,000 Building $600,000 Machinery $500,000 Patents $600,000 The building is depreciated using the double-declining balance method. Other information is: Salvage value $60,000 Estimated useful life in years 30 The machinery is depreciated using the units-of-production method. Other information is: Salvage value, percentage of cost 10% Estimated total production output in units 400,000 Actual production in units was as follows: 2019: 40,000 2020: 80,000 2021: 120,000 The patents are amortized on a straight-line basis. They have no salvage value. Estimated useful life of patents in years 20 On December 31, 2020, the value of the patents was estimated to be $900,000 Where applicable, the company uses the ½ year rule to calculate depreciation and amortization expense in the years of acquisition and disposal. Its fiscal year-end is December 31. The machinery was traded on December 2, 2021 for new machinery. Other information is: Fair value of old machinery $240,000 Trade-in allowance $336,000 List price for new machinery $504,000 Estimated useful life of new machinery in years 20 Estimated salvage value of new machinery $15,120 The new machinery if depreciated using the straight-line method and ½ year rule. On August 14, 2023, an addition was made. This amount was material. Other relevant information is as follows: Amount of addition, paid in cash $100,000 Number of years of useful life from 2023 (original machinery and addition): 20 Salvage value, percentage of addition 10%

Please solve this question: Cost of the addition to the machinery on August 14, 2023.

Answer 1

SOLUTION:-

In the books of Brown company

GENERAL JOURNAL

S. No	Date	Journal Entry	Debit	Credit
1	01-01-2019	Land A/c	$600000
		Building A/c	$600000
		Machinery A/c	$500000
		Patents A/c	$600000
		Goodwill A/c	$690000
		To Cash paid		$2990000
		(Being Assets Purchased)
2	31-12-2019	Depreciation A/c	$102000
		To Building		$40000
		To Machinery		$32000
		To Patents		$30000
		(Being depreciation charged for the year)
3	31-12-2020	Patents A/c	$360000
		To Appreciation in value of patents		$360000
		(Being patents value appreciated to $900000 from $540000)
4	02-12-2021	New Machinery A/c	$504000
		To Fair Value of Machinery		$240000
		To Trade in Allowance (Balancing Fig)		$264000
		(Being old machinery traded for new machinery)
5	31-12-2021	Depreciation A/c	$12222
		To New Machinery		$12222
		(Being Asset depreciated on ½ rule)
6**	14-08-2023	New Machinery A/c	$100000
		To Cash paid		$100000
		(Being addition made to New machinery)
7	31-12-2023	Depreciation A/c	$26500
		To New Machinery		$22000
		To Addition on Machinery		$4500
		(Being Asset depreciated on ½ rule)

Working Note:                 Depreciation of New Machinery

	Opening	Depreciation	Closing
2021	504000	24444	479556
2022	479556	24444	455112
2023 (Revised to 20 Years)	455112	22000	433112
2023 (Addition)	100000	4500	95500