Your audit client, PEW Company, followed up on its plan to expand its operations in 2018. The entity’s plan was to start the construction of its new building beginning of March and start its operations in the new site beginning of November. PEW, however, projected at the beginning of the year that its funds will not be enough to start the construction come March. So, on January 1, 2018, the entity obtained a loan from Bank for $50 million, specifically to fund the construction. The loan is due December 31, 2020, and the entity will be paying 12% interest every December 31. Since the construction will not commence until beginning of March, and the construction will not require a one-time outflow of cash, the entity decided to invest the unused proceeds in an investment facility that yields 0.5% return monthly. The unused proceeds will be invested at the beginning of each month. The first investment was made on January 1, 2018. Construction started on March 1, 2018 and ended on October 31, 2018. The schedule of payments made during the construction is as follows: Date Amount March 1 5,000,000 April 30 8,600,000 July 1 10,000,000 August 1 7,400,000 September 30 2,000,000 October 31 15,000,000 The entity started using the building on November 2 and estimated that the building will have an estimated useful life of 20 years with no residual value. The building was capitalized for $48 million, equal to the actual payments made during the construction period. Interest paid for the loan was recorded as interest expense, and all returns from the investment facility were recorded as income. The entity provided a depreciation of $400,000 for 2018 using the straight-line method. Based on the above and the result of your audit, answer the following: Prepare the adjusting journal entry “in relation to the depreciation” in order to reflect the correct depreciation expense, assuming the nominal accounts are still open (do not use Income Summary account).
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.
Your audit client, PEW Company, followed up on its plan to expand its operations in 2018. The entity’s plan was to start the construction of its new building beginning of March and start its operations in the new site beginning of November.
PEW, however, projected at the beginning of the year that its funds will not be enough to start the construction come March.
So, on January 1, 2018, the entity obtained a loan from Bank for $50 million, specifically to fund the construction. The loan is due December 31, 2020, and the entity will be paying 12% interest every December 31.
Since the construction will not commence until beginning of March, and the construction will not require a one-time outflow of cash, the entity decided to invest the unused proceeds in an investment facility that yields 0.5% return monthly. The unused proceeds will be invested at the beginning of each month. The first investment was made on January 1, 2018.
Construction started on March 1, 2018 and ended on October 31, 2018. The schedule of payments made during the construction is as follows:
Date Amount
March 1 5,000,000
April 30 8,600,000
July 1 10,000,000
August 1 7,400,000
September 30 2,000,000
October 31 15,000,000
The entity started using the building on November 2 and estimated that the building will have an estimated useful life of 20 years with no residual value. The building was capitalized for $48 million, equal to the actual payments made during the construction period. Interest paid for the loan was recorded as interest expense, and all
Based on the above and the result of your audit, answer the following:
Prepare the
assuming the nominal accounts are still open (do not use Income Summary account).
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