Chapter 10, Problem 4BP

To determine

Prepare journal entries to record the given transactions and events.

Explanation of Solution

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

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 van as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 1, 2014	Equipment	27,670
	Cash		27,670
	(To record the costs of van)

Table (1)

Working Note:

Calculate the costs of van.

$\begin{array}{c}\text{Costs of van=}\left(\text{Purchase cost+Sales tax}\right)\\ =\$25,860+\$1,810\\ =\$27,670\end{array}$

• 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 van as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 3, 2014	Equipment	1,850
	Cash		1,850
	(To record the betterment of van)

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 (In $)	Credit (In $)
December 31, 2014	Depreciation expense		5,124
	Accumulated depreciation			5,124
	(To record the depreciation expense)

Table (3)

Working Note:

Calculate the depreciable cost.

	Amount (In $)
Total original cost	27,670
Cost of betterment	1,850
Revised cost of equipment	29,520
Less: Revised salvage $\left(\$3,670+\$230\right)$	3,900
Depreciable Cost	$25,620

Table (4)

Calculate the depreciation expense for the year 2014 after January 3^rd betterment.

$\begin{array}{c}\text{Depreciation = }\frac{\text{Depreciable cost}}{\text{Estimated useful life of the asset}}\\ =\frac{\$25,620}{5\text{years}}\\ =\$5,124\end{array}$

• Depreciation expense is a component of retained earnings. It decreases the retained earnings. 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 van as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
January 1, 2015	Equipment	2,064
	Cash		2,064
	(To record the extraordinary repair on van)

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 van as follows:

Date	Account Title and Explanation	Debit ($)	Credit ($)
May 10, 2015	Repairs expense–Equipment	800
	Cash		800
	(To record the betterment of van)

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 (In $)	Credit (In $)
December 31, 2015	Depreciation expense		3,760
	Accumulated depreciation			3,760
	(To record the depreciation expense)

Table (7)

Working Note:

Calculate the depreciable cost.

	Amount (In $)
Total original cost $\left(\$29,520+\$2,064\right)$	31,584
Less: Accumulated depreciation	5,124
Book value	26,460
Less: Salvage	3,900
Depreciable Cost	$22,560

Table (8)

Calculate the depreciation expense for the year 2015 after January 1^st extraordinary repair.

$\begin{array}{c}\text{Depreciation = }\frac{\text{Depreciable cost}}{\text{Remaining estimated useful life of the asset}}\\ =\frac{\$22,560}{5\text{years}-1\text{year+2}\text{years}}\\ =\frac{\$22,560}{6\text{years}}\\ =\$3,760\end{array}$

• Depreciation expense is a component of retained earnings. It decreases the retained earnings. 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.