Chapter 10, Problem 4AP

To determine

Prepare journal entries to record the given transactions and events.

Explanation of Solution

Depreciation expense:

Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolescence.

Prepare journal entry to record the cost of the loader as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 1, Year 1	Equipment (1)	300,600
	Cash		300,600
	(To record the costs of loader)

Table (1)

Working Note:

Calculate the costs of loader.

$\begin{array}{c}\text{Costs of loader=}\left(\text{Purchase cost+Sales tax+Transportation cost}\right)\\ =\$287,600+\$11,500+\$1,500\\ =\$300,600\end{array}$ (1)

• Equipment is an asset account and it is increased. Therefore debit equipment account.
• Cash is an asset account and it is decreased. Therefore credit cash account.

Prepare journal entry to record the betterment of the loader as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 3, Year 1	Equipment	4,800
	Cash		4,800
	(To record the betterment of loader)

Table (2)

• Equipment is an asset account and it is increased. Therefore debit equipment account.
• Cash is an asset account and it is decreased. Therefore credit cash account.

Prepare journal entry to record the depreciation expense as follows:

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, Year 1	Depreciation expense (3)		70,850
	Accumulated depreciation			70,850
	(To record the depreciation expense)

Table (3)

Working Note:

Calculate the depreciable cost:

	Amount ($)
Total original cost	300,600
Add: Cost of betterment	4,800
Revised cost of equipment	305,400
Less: Revised salvage $\left(\$20,600+\$1,400\right)$	22,000
Depreciable Cost	$283,400

Table (4)

…… (2)

Calculate the depreciation expense (for year 1) after January 3^rd betterment:

$\begin{array}{c}\text{Depreciation = }\frac{\text{Depreciable cost}}{\text{Estimated useful life of the asset}}\\ =\frac{\$283,400(2)}{4\text{years}}\\ =\$70,850\end{array}$ (3)

• Depreciation expense is a component of stockholder’s equity. It decreases the stockholder’s equity. Thus, depreciation expense is debited.
• Accumulated depreciation is a contra asset which decreases the value of the asset. Increase in accumulated depreciation decreases the asset’s value. Thus, accumulated depreciation on equipment is credited.

Prepare journal entry to record the extraordinary repair on loader as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 1, Year 2	Equipment	5,400
	Cash		5,400
	(To record the extraordinary repair on loader)

Table (5)

• Equipment is an asset account and it is increased. Therefore debit equipment account.
• Cash is an asset account and it is decreased. Therefore credit cash account.

Prepare journal entry to record the ordinary repair on the loader as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
February 17, Year 2	Repairs expense–Equipment	820
	Cash		820
	(To record the betterment of loader)

Table (6)

• Repairs expenses are the components of the stockholder’s equity. An expense decreases the stockholder’s equity. Thus, repairs expenses account is debited.
• Cash is an asset account, and it is decreased. Thus, credit the cash account.

Prepare journal entry to record the depreciation expense as follows:

Date	Account title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 31, Year 2	Depreciation expense (4)		43,590
	Accumulated depreciation			43,590
	(To record the depreciation expense)

Table (7)

Working Note:

Calculate the depreciable cost.

	Amount ($)
Total original cost $\left(\$305,400+\$5,400\right)$	310,800
Less: Accumulated depreciation	70,850
Book value	239,950
Less: Salvage	22,000
Depreciable Cost	$217,950

Table (8)

…… (3)

Calculate the depreciation expense for the year 2 after January 1^st extraordinary repair.

$\begin{array}{c}\text{Depreciation = }\frac{\text{Depreciable cost}}{\text{Remaining estimated useful life of the asset}}\\ =\frac{\$217,950(3)}{4\text{years}-1\text{year+2}\text{years}}\\ =\frac{\$217,950}{5\text{years}}\\ =\$43,590\end{array}$ (4)

• Depreciation expense is a component of stockholder’s equity. It decreases the stockholder’s equity. Thus, depreciation expense is debited.
• Accumulated depreciation is a contra asset which decreases the value of the asset. Increase in accumulated depreciation decreases the asset’s value. Thus, accumulated depreciation on equipment is credited.