Determining Financial Statement Effects of an Asset Acquisition and Depreciation

ID: 2339856 • Letter: D

Question

Determining Financial Statement Effects of an Asset Acquisition and Depreciation (Straight-Line Depreciation) During Year 1, Ashkar Company ordered a machine on January 1 at an invoice price of $21,000. On the date of delivery, January 2, the company paid $6,000 on the machine, with the balance on credit at 10 percent interest due in six months. On January 3, it paid $1,000 for freight on the machine. On January 5, Ashkar paid installation costs relating to the machine amounting to $2,500. On July 1, the company paid the balance due on the machine plus the interest. On December 31 (the end of the accounting period), Ashkar recorded depreciation on the machine using the straight-line method with an estimated useful life of 10 years and an estimated residual value of $4,000. Required (round all amounts to the nearest dollar) 1. Indicate the effects (accounts, amounts, and+or- of each transaction (on January 1, 2, 3, and 5 and July 1) on the accounting equation. Use the following schedule: Date Assets Liabilities Stock 2. Compute the acquisition cost of the machine 3. Compute the depreciation expense to be reported for Year 1 4. What impact does the interest paid on the 10 percent note have on the cost of the machine? Under what circumstances can interest expense be included in acquisition cost? 5. What would be the net book value of the machine at the end of Year 2?

Explanation / Answer

Date

Assets

Liabilities

Stock

Jan-01

No effect

Jan-02

Cash -6,000; Equipment +21,000

Short term note payable +15,000

Jan-03

Cash -1,000; Equipment +1,000

Jan-05

Cash -2,500; Equipment +2,500

Jul-01

Cash -15,750

Short term note payable -15,000

Interest expense* -750

Interest exp = 15,000 * 0.10 * 6/12 = 750

Acquisition cost of the machine

Cash

6000

Note payable with supplier

15,000

Freight

1,000

Installation

2,500

Total acquisition cost

24,500

3) Depreciation Amount:

= (Cost - Residual value) * 1/10

= ($24,500 - $4,000) * 1/10

= 2,050

4) On July 1, the amount of $750 is paid and is recorded as interest expense, however it is is not capitalized (i.e. added to the cost of the asset) because interest can be capitalized only on constructed assets and this machine was purchased.

Equipment (cost)