Question

E8-4 Determining Financial Statement Effects of an Asset Acquisition and Depreciation (Straight-Line Depreciation) LO8-2, 8-3 The following information applies to the questions displayed below 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 dué 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 References E8-4 Determining Financial Statement Effects of an Asset Acquisition and Depreciation Straight-Line Depreciation) LO8- 2, 8-3 Section Break Required 8-4 Part1 equired: . Indicate the effects (accounts, amounts, and + or-)of each transaction on the accounting equation. Use the does not Impact the accounting equation choose "No effect" in the first column under "Assets") oes not Impact the accounting equation choose Assets Liabilities Date January 1 January 2 January 3 January 5 July 1 E8-4 Part 2 2. Compute the acquisition cost of the machine. Acquisition Cost of the Machine Acquisition cost value: 1.00 points E8-4 Part 3 3. Compute the depreciation expense to be reported for Year 1 reciation expense References eBook & Resources Accounting E8-4 Part 3 Equation Check my work value 2.00 points te he th at 5. What would be the net book value of the machine at the end of Year 2? (Amounts to be deducted should be indicated by a minus sign.) Net book value at end of year 2

Answer 1

Answer:

Date                       Particulars                      Debit                    Credit

Jan 2              Machinery                          $ 21,000 (Dr)

                        Cash                                                               $ 6,000 (Cr)

                     Accounts Payable                                             $ 15,000 (Cr)

( Purchased machinery for cash and  Accounts Payable at 10% due in 6 months)

Jan 3           Machine (Freight in)         $ 1000 (Dr)

                     Cash                                                                  $ 1000 (Cr)

Paid Freight  on the machine $ 1000

Jan 5           Machine ( Installation Charges) $ 2,500(Dr)

                       Cash                                                                   $ 2500 (Cr)

Paid installation Charges $ 25,000

July 1                  Accounts Payable               $ 15,000 (dr)

                         Interest                                   $ 750(dr)

                          Cash                                                               $ 15,750 (cr)

(Interest Calculation for 6 months =  15,000*10/100* 6/12= $ 750)

Dec 31           Depreciation Account            $ 1600 (dr)

                       Accumulated Depreciation                            $ 1600 (cr)

( Depreciation on Straight Line = 21,000- 4000/10= $ 1600)

Dec 31            Profit & Loss Account           $ 1600 (dr)

                         Depreciation Account                                $ 1600 (cr)

Accounting Equation

                         Assets = Liabilities + Owners Equity

Jan 2                + $ 21000 ( increase in machine)  - $ 6000 ( decrease in Cash=  + $ 15,000( increase in liabilities) + No Effect(OE)

Jan 3        Assets + $ 1000(MAchines) (Decrease in  Cash) - $ 1000=  No Effect

Jan 5         Assets + $ 2500( machines)  Decrease in Cash - $ 2500= No Effect

July 1          - $ 15,750 (decrease in cash) =  -$ 15,750 ( Decrease in Liabilities ) + No Effect (OE)

Dec 31      - $ 1600 (depreciation of  machine) = No Effect

Acquisition Cost of Machine

Cost Of Machine     =       $ 21,000

Freight On Machine =       $ 1000

Installation Charges  =      $ 2500

Total Cost =                         $ 24,500

Depreciation Expense Calculated on Straight Line Method=  Cost of Asset- Residual Value/ Useful Life= $21000- $ 4000/ 10= $1600

Depreciation For the  Second Year = $ 1600

Net Book Value after 2 years=  

$ 24500- $ 3200 = $ 21,300