A- On January 1, 2011, Gadget Twin Manufacturing acquired a new machine from Acm

Question

A-

On January 1, 2011, Gadget Twin Manufacturing acquired a new machine from Acme Equipment Company that had a selling price (including sales tax) of $112,000. Acme charged $2,500 to deliver the equipment and $10,000 to install it at Gadget Twin’s site. Gadget Twin had also made arrangements for Acme to modify and test the machine to Gadget Twin’s specifications after installation. Acme provided this service at an additional cost of $375. Gadget Twin also had Acme apply their corporate logo to the machine for an additional cost of $125. Gadget Twin Manufacturing is a fairly young company and made special payment arrangements with Acme. Acme agreed to accept a piece of land owned by Gadget Twin with a fair market value of $31,250 as partial payment for the machine. Gadget Twin paid the remainder in cash.

GENERAL JOURNAL

   

Jan. 01

  

   

   

                  

           

  

   

   

                  

           

  

   

   

                  

B-

APPLY THE CONCEPTS: Calculate and determine the entry for units-of-production depreciation

The machine purchased by Gadget Twin Manufacturing (see the journal entry above) is expected to produce 295,000 units. At the end of its useful life, the residual value of the machine is estimated to be $7,000. Gadget Twin Manufacturing's fiscal year ends each December 31. In the table to the below, enter the machine's depreciation expense, the balance of Accumulated Depreciation, and the book value for each year the machine has been in service, using the units-of-production method. The actual production for the machine is as follows:

Using the above data, calculate the depreciation cost per unit:

GENERAL JOURNAL

page

   

             DATE         DESCRIPTION DOC.
NO. POST.
REF. DEBIT CREDIT      1

Jan. 01

  

   

   

                  

1 2

           

  

   

   

                  

2 3

           

  

   

   

                  

3

Explanation / Answer

Since the machine is purchased which is in the nature of capital expenditure,all cost incurred till the machine is finally put to use has to be capitalised.In the given case the entire amount spent(112000+2500+10000+375+125) ie $125000 has to be capitalised.Thus journal entry would be

Machine A/C --------Dr 125000

To Land A/C 31250

To Cash A/C 93750

(Being Asset capitalised and payment made in form of cash and land)

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