Question

O'Connor Company ordered a machine on January 1 at a purchase price of $120,000. On the date of delivery, January 2, the company paid $30,000 on the machine and signed a long- term note payable for the balance. On January 3, it paid $1,200 for freight on the machine. On January 5, O'Connor paid cash for installation costs relating to the machine amounting to $7,200. 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 $12,800. 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

Assets 90,000 Date Jan. 01 No effect Jan. 02 Machine Cash Jan. 03 Machine Cash Jan. 05 Machine Cash 120,000 -30,000 1,200 -1,200 7,200 -7,200 Liabilities No effect Notes payable No effect No effect No effect No effect No effect Stockholders' equity No effect No effect No effect No effect No effect No effect No effect 2 Acquisition cost of the machine = 120,000+1,200+,7200 = 128,400 3 Depreciation exp. For 1st year = (128,400-12,800)/10 =11,560 4 Book value of the machine at the end of 2nd year = 128,400-11,560-11,560 =105,280