Question

On January 2, 2015, Athol Company bought a machine for use in operations. The machine has an estimated useful life of eight years and an estimated residual value of $800. The company provided the following information:
a.	Invoice price of the machine, $55,400.
b.	Freight paid by the vendor per sales agreement, $830.
c.	Installation costs, $1,730 cash.
d.	Cost of cleaning up the supplies, boxes, and other garbage that remained after the installation of the machine, $100 cash.
e.	Payment of the machine's price was made as follows:
	January 2:
	• Issued 1,100 common shares of Athol Company at $4 per share.
	• Signed a $36,000 note payable due April 16, 2015, plus 10 percent interest.
	• Balance of the invoice price to be paid in cash. The invoice allows for a 3 percent cash discount if the cash payment is made by January 11.
	January 15: Paid the balance of the invoice price in cash.
	April 16:     Paid the note payable and interest in cash.
f.	On June 30, 2017, the company completed the replacement of a major part of the machine that cost $12,500. This expenditure is expected to reduce the machine’s operating costs, increase its estimated useful life by two years, and decrease its estimated residual value to $300.
g.	Assume that on October 1, 2022, the company decided to replace the machine with a newer, more efficient model. It then sold the machine to Sako Ltd. on that date for $25,000 cash.

Task:

1.	Compute the acquisition cost of the machine.

3.

Prepare the journal entries to record the purchase of the machine and subsequent cash payments on January 15 and April 16, 2015. (Do not round intermediate calculations. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

a. Record purchase of machine by issuing shares, signing a note and the balance on account. b. Record payment of machine installation costs. c. Record payment made after discount period. d. Record payment of note and interest 4. Compute the depreciation expense for each of the years 2015, 2016, and 2017, assuming the company’s fiscal year ends on December 31. Use the straight-line depreciation method. (Do not round intermediate calculations.) 5. Prepare the journal entry to record the sale of the machine on October 1, 2022. (Hint: First determine the balance of the accumulated depreciation account on that date.) (Do not round intermediate calculations. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

1	Acquisition cost of the machine:
					$
	Invoice price				55400
	Freight charges				830
	Installation cost				1730
	Total				57960
	Cost of cleaning up will be charged to profit and loss account since it is not directly related to the acquisition of asset
3	Journal entries:
	Sl No.	Account titles and explanation				Debit	Credit
	a.	Machine			(55400+830)	56230
		Common stock			(1100*4)		4400
		Note payable					36000
		Accounts payable					15830
		(Purchase of machine)
	b.	Machine				1730
		Cash					1730
		(Installation cost paid)
	c.	Accounts payable				15830
		Cash					15830
		(Payment made)
	d.	Note payable				36000
		Interest expense		(36000*10%*3.5/12)		1050
		Cash					37050
		(Note paid along with interest from
		Jan 2 to April 15- 3.5 months approx.)
4	Depreciation under straight-line method=(Acquisition cost-estimated residual value)/useful life
	2015
	Depreciation =(57960-800)/8=$ 7145
	2016
	Depreciation =(57960-800)/8=$ 7145
	2017
	Replacement of major part is expected to reduce the machine’s operating costs, increase its estimated useful life.
	Hence, this expenditure need to be capitalized
	Since there is a revision in useful life and residual value,depreciation need to be recomputed as follows
	Depreciation =(Net book value-Revised residual value)/Remaining useful life of asset
	Net book value:
					$	$
	Acquisition cost					57960
	Less: depreciation
	2015				7145
	2016				7145	14290
						43670
	Add: Replacement cost					12500
	Net book value					56170
	Remaining useful life=Revised useful life-Years passed
	Revised useful life=8+2=10 years
	Remaining useful life=10-2=8 years
	Depreciation =(56170-300)/8=$ 6893.75
5	Accumulated depreciation as on Oct 1 ,2022:
						$
	2015					7145
	2016					7145
	2017					6893.75
	2018					6893.75
	2019					6893.75
	2020					6893.75
	2021					6893.75
	Till Oct 1,2022-For 9 months			6893.75*(9/12)		5170.31
	Total					53929.06
	Journal entry for sale of machinery:
						Debit	Credit
	Cash					25000
	Accumulated depreciation					53929
	Machinery			(57960+12500)			70460
	Gain on sale of machinery			(Balancing figure)			8469