American Inc. constructs equipment for its own use. The account below is for a manufacturing equipment it had assembled in 2016. Equipment Cost of dismantling old equipment $ 43,440 Debit Cash proceeds from sale of old equipment $ 36,000 Credit Raw materials used in construction of new equipment $ 228,000 Debit Labor in construction of new machine $147,000 Debit Cost of installation $ 33,600 Debit Cost of testing the equipment $ 25,000 Debit Materials spoiled in machine trial run $ 7,200 Debit Profit on construction $ 72,000 Debit An analysis of the details in the account disclosed the following: a. The old equipment, which was removed before the installation of the new one, had been fully depreciated. b. Cash discounts received on the payments for materials used in construction totaling $9,000 were reported in the purchase discounts account. c. The factory overhead account shows a balance of $876,000 for the year ended December 31, 2016; this balance exceeds normal overhead on regular plant activities by approximately $50,700 and is attributable to equipment construction. d. A profit was recognized on construction for the difference between costs incurred and the price at which the equipment could have been purchased. e. While testing the equipment, sample items were produced. These were sold for $5,000 which was credited to miscellaneous revenue. Based on the above and the result of your audit, prepare “individual” adjusting journal entries to correct the accounts as of December 31, 2016, assuming the nominal accounts are still open (do not use Income Summary accou
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
American Inc. constructs equipment for its own use. The account below is for a manufacturing equipment it had assembled in 2016.
Equipment
Cost of dismantling old equipment $ 43,440 Debit
Cash proceeds from sale of old equipment $ 36,000 Credit
Raw materials used in construction of new equipment $ 228,000 Debit
Labor in construction of new machine $147,000 Debit
Cost of installation $ 33,600 Debit
Cost of testing the equipment $ 25,000 Debit
Materials spoiled in machine trial run $ 7,200 Debit
Profit on construction $ 72,000 Debit
An analysis of the details in the account disclosed the following:
a. The old equipment, which was removed before the installation of the new one, had been fully
b. Cash discounts received on the payments for materials used in construction totaling $9,000 were reported in the purchase discounts account.
c. The factory
d. A profit was recognized on construction for the difference between costs incurred and the price at which the equipment could have been purchased.
e. While testing the equipment, sample items were produced. These were sold for $5,000 which was credited to miscellaneous revenue.
Based on the above and the result of your audit, prepare “individual”
December 31, 2016, assuming the nominal accounts are still open (do not use Income Summary account).
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