Explaining the Nature of a Long-Lived Asset and Determining and Recording the Financial St...

Explaining the Nature of a Long-Lived Asset and Determining and Recording the Financial Statement Effects of Its Purchase (P8-1)

On June 1, 2012, the Wallace Corp. bought a machine for use in operations. The machine has an estimated useful life of six years and an estimated residual value of $2,000. The company provided the following expenditures:

a. Invoice price of the machine, $60,000.

b. Freight paid by the vendor per sales agreement, $650.

c. Installation costs, $1,500.

d. Payment was made as follows:

On June 1:

The installation costs were paid in cash.

Wallace Corp. common stock, par $2; 2,000 shares (market value, $6 per share).

Balance of the invoice price on a note payable, 12 percent due September 2, 2012 (principal plus interest).

On September 2:

Wallace Corp. paid the balance and interest due on the note payable.

Required:

1. What are the classifications of long-lived assets? Explain their differences.

2. Record the purchase on June 1 and the subsequent payment on September 2. Show computations.

3. Indicate the accounts, amounts, and effects (+ for increase and – for decrease) of the purchase and subsequent cash payment on the accounting equation. Use the following structure:

4. Explain the basis you used for any questionable items.