Chapter 9, Problem 3PA

(1)

To determine

To indicate: The effect of given transactions, on the accounting equation, and journalize the transactions

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relation between resources or assets of a company and claims of resources to creditors and owners.

Accounting equation is expressed as shown below:

$\text{Assets = Liabilities + Stockholders' Equity}$

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

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Effect of transaction occurred on January 2:

Assets	=	Liabilities	+	Stockholders’ Equity
Cash (–$20,000)		Notes Payable (+$230,000)
Equipment (+$250,000)

Table (1)

Prepare journal entry for the transaction occurred on January 2.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
January	2	Equipment			250,000
			Cash			20,000
			Notes Payable			230,000
		(To record purchase of equipment)

Table (2)

Description:

• Equipment is an asset account. Since equipment is bought, asset account increased, and an increase in asset is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
• Notes Payable is a liability account. Since the amount to be paid increased, liability increased, and an increase in liability is credited.

Effect of transaction occurred on January 3:

Assets	=	Liabilities	+	Stockholders’ Equity
Equipment (+$20,000)		Accounts Payable (+$20,000)

Table (3)

Prepare journal entry for the transaction occurred on January 3.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
January	3	Equipment			20,000
			Accounts Payable			20,000
		(To record purchase of equipment)

Table (4)

Description:

• Equipment is an asset account. Since equipment is bought, asset account increased, and an increase in asset is debited.
• Accounts Payable is a liability account. Since the amount to be paid increased, liability increased, and an increase in liability is credited.

Effect of transaction occurred on January 30:

Assets	=	Liabilities	+	Stockholders’ Equity
Cash (–$20,000)		Accounts Payable (–$20,000)

Table (5)

Prepare journal entry for the transaction occurred on January 30.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
January	30	Accounts Payable			20,000
			Cash			20,000
		(To record payment of on account purchases)

Table (6)

Description:

• Accounts Payable is a liability account. Since the amount to be paid is paid, liability decreased, and a decrease in liability is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Effect of transaction occurred on February 1:

Assets	=	Liabilities	+	Stockholders’ Equity
Cash (–$800)				Repairs and Maintenance Expense (–$800)

Table (7)

Prepare journal entry for the transaction occurred on February 1.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
February	1	Repairs and Maintenance Expense			800
			Cash			800
		(To record payment of expense)

Table (8)

Description:

• Repairs and Maintenance Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Effect of transaction occurred on March 1:

Assets	=	Liabilities	+	Stockholders’ Equity
Cash (–$3,600)
Licensing Rights (+$3,600)

Table (9)

Prepare journal entry for the transaction occurred on March 1.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
March	1	Licensing Rights			3,600
			Cash			3,600
		(To record purchase of licensing rights)

Table (10)

Description:

• Licensing Rights is an asset account. Since licensing rights are bought, asset account increased, and an increase in asset is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

(2)

To determine

The depreciation expense and amortization expense as on March 31

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.

Amortization expense: The expense which reflects the usage of intangible asset by the way of reducing the cost of the asset over the estimated useful definite life, is referred to as amortization expense.

Formula for amortization expense:

$\text{Amortization expense}=\text{Cost of intangible asset}\text{×}\frac{1}{\text{Useful life}}$

Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life, is referred to as double-declining-balance method.

Formula for double-declining-balance depreciation method:

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense}\end{array}\}=\left(\begin{array}{l}\text{Book value at the }\\ \text{beginning of the period }\end{array}\right)\text{× Depreciation rate}\\ \text{= }\left(\text{Cost–Accumulated depreciation}\right)\text{×}\frac{\text{2}}{\text{Useful life}}\end{array}$

Determine the depreciation expense for the equipmentfor 3 months (from January2 to March 31) under double-declining-balancemethod, if cost of machine is $270,000, useful life is 5 years, and accumulated depreciation is $0.

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense}\end{array}\}=\text{Depreciable cost }\text{× Depreciation rate}\\ \text{= }\left(\begin{array}{l}\text{Cost–}\\ \text{Accumulated depreciation}\end{array}\right)\text{×}\frac{2}{\text{Useful life}}\times \text{Time period }\\ =\left(\$270,000–\$0\right)\times \frac{2}{\text{5 years}}\times \frac{3}{12}\\ =\$27,000\end{array}$

Determine amortization expense for 1 month (from March 1 to March 31), if cost of licensing right is $3,600, and useful life is 2 years.

$\begin{array}{c}\text{Amortization expense =}\left\{\begin{array}{l}\text{Cost of intangible asset}\text{×}\\ \frac{\text{1}}{\text{Useful life}}\text{× Time period}\end{array}\right\}\\ \text{= \$3,600 × }\frac{\text{1}}{\text{2 years}}\times \frac{1}{12}\\ \text{= \$150}\end{array}$

(3)

To determine

To journalize: The entries for depreciation expense and amortization expense

Explanation of Solution

Prepare journal entry for the depreciation expense and amortization expense as on March 31 (Refer to Requirement (2) for the expense values).

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
March	31	Depreciation Expense			27,000
		Amortization Expense			150
			Accumulated Depreciation–Equipment			27,000
			Accumulated Amortization			150
		(To record depreciation expense)

Table (11)

Description:

• Depreciation Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Amortization Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Accumulated Depreciation–Equipment is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.
• Accumulated Amortization is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.