On June 1, 2019, Concord Company purchased the following machine for use in its

ID: 2547524 • Letter: O

Question

On June 1, 2019, Concord Company purchased the following machine for use in its production process.

The cash price of this machine was $37,500. Related expenditures included: sales tax $3,600, shipping costs $100, insurance during shipping $50, installation and testing costs $120, and $150 of oil and lubricants to be used with the machinery during its first year of operations. Concord estimates that the useful life of the machine is 4 years with a $5,950 salvage value remaining at the end of that time period. Assume that the straight-line method of depreciation is used.

A. Prepare the following:

The journal entry to record its purchase on June 1, 2019.

The journal entry to record annual depreciation at December 31, 2019.

B. Calculate the amount of depreciation expense that Concord should record for each year of its useful life under the following assumptions.

(1)

Concord uses the straight-line method of depreciation.

(2)

Concord uses the declining-balance method. The rate used is twice the straight-line rate.

(3)

Concord uses the units-of-activity method and estimates that the useful life of the machine is 117,100 units. Actual usage is as follows: 2019, 45,000 units; 2020, 33,500 units; 2021, 22,000 units; 2022, 16,600 units.

Explanation / Answer

A. 1) The journal entry to record its purchase on June 1, 2019 is :
Machinery A/C Dr. $41,370
To Cash A/C $41,370

The amounts to be capitalized in the cost of the asset include the amount paid for the asset and all other costs that are necessary to get the asset ready for use. So, the cost of the asset includes cash price of machine (37500), sales tax (3600), shipping costs (100), insurance during shipping (50), installation & testing costs (120).
Oil and lubricant cost is not included because it is to be used with the machine during the first year of operations and not to get the machine ready for use.

A. 2) The journal entry to record annual depreciation at December 31, 2019 is :
Depreciation A/C Dr. $5,165
To Machinery A/C $5,165

Depreciation is calculated for the period June 1, 2019 to December 31, 2019 i.e. for 7 months.
Hence, yearly depreciation under straight line method = Cost of asset - Salvage value / Estimated useful life
= 41370 - 5950 / 4
= $8,855
Hence, depreciation for 7 months = 8855 * 7/12 = $5,165

B. 1) Under straight line method of depreciation, the amount of depreciation recorded for each year of its useful life is equal.
1st year - $8,855
2nd year - $8,855
3rd year - $8,855
4th year - $8,855

B. 2) Under declining balance method of depreciation, salvage value is not taken into account when calculating annual depreciation and the asset cannot be depreciated below its salvage value.
Hence, depreciation as per straight line method = Cost / Estimated useful life = 41370 / 4 = $10,343
As rate used for double declining method is twice the straight line rate, yearly depreciation = 10343* 2 = $20,686.
2019 : $20,686
2020 : Cost 41370 - year 1 depreciation 20686 - salvage value 5950 = $14,734
No depreciation will be recorded after 2020.

B. 3) Depreciation base = Historical cost - Salvage value = 41370 - 5950 = $35,420
Yearly Depreciation under units-of-activity method
= Depreciation base * Actual production during the period / Total estimated production over useful life

2019 : 35420 * 45000/ 117100 = $13,611
2020 : 35420 * 33500/ 117100 = $10,133
2021 : 35420 * 22000/ 117110 = $6,655
2022 : 35420 * 16600/ 117100 = $5,021

Navigate

On June 1, 2017, a cheque in the amount of $5,160 was issued for a two-year subs

On June 1, 2019, Concord Company purchased the following machine for use in its

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.

On June 1, 2019, Concord Company purchased the following machine for use in its

Question

Explanation / Answer

Related Questions

Navigate