Question

E9-3 Determining Financial 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 pald $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 elght on the ition on the machinechine amounting to sa 600 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?

Answer 1

1.

Date	Assets		=	Liabilities		+	Stockholders' Equity
Jan-01
Jan-02	Machine	+60000		Notes payable	+45000
	Cash	-15000
Jan-03	Machine	+600
	Cash	-600
Jan-05	Machine	+3600
	Cash	-3600

2. Acquisition Cost = Purchase price + Freight charges + Installation costs = $60000 + $600 + $3600 = $64200

3. Depreciation Expense = (Acquisition cost - Estimated residual value)/Estimated useful life = ($64200 - $6400)/10 years = $57800/10 = $5780

4. Book Value = Acquisition cost - Accumulated depreciation = $64200 - (2 x $5780) = $64200 - $11560 = $52640