Chapter 9, Problem 4PA

To determine

Prepare journal entries for the given transaction.

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.

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.

Prepare journal entry for the transaction occurred on January 2, 2018.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2018
January	2	Building			95,000
			Cash			95,000
		(To record the purchase of building)

Table (1)

Description:

• Building is an asset and it is increased by $95,000. Therefore, debit building account with $95,000.
• Cash is an asset and it is decreased by $95,000. Therefore, credit the cash account with $95,000.

Prepare journal entry for the transaction occurred on January 3, 2018.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2018
January	3	Building			5,000
			Cash			5,000
		(To record the purchase of building)

Table (2)

Description:

• Building is an asset and it is increased by $5,000. Therefore, debit building account with $5,000.
• Cash is an asset and it is decreased by $5,000. Therefore, credit the cash account with $5,000.

Prepare journal entry for the transaction occurred on April 1, 2018.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2018
April	1	Equipment			38,000
			Cash			38,000
		(To record the purchase of equipment)

Table (3)

Description:

• Equipment is an asset and it is increased by $38,000. Therefore, debit equipment account with $38,000.
• Cash is an asset and it is decreased by $38,000. Therefore, credit the cash account with $38,000.

Prepare journal entry for the transaction occurred on May 13, 2018.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2018
May	13	Repairs and Maintenance Expense			250
			Cash			250
		(To record the payment of expense)

Table (4)

Description:

• Repair expense is an expense account and it is increased by $250. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit repair expenses account with $250.
• Cash is an asset and it is decreased by $250. Therefore, credit the cash account with $250.

Prepare journal entry for the transaction occurred on April 1, 2018.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2018
April	1	Patents			20,000
			Cash			20,000
		(To record the purchase of patents)

Table (5)

Description:

• A Patent is an asset and it is increased by $20,000. Therefore, debit the patent account with $20,000.
• Cash is an asset and it is decreased by $20,000. Therefore, credit the cash account with $20,000.

Prepare journal entry for the depreciation expense and amortization expense as on December 31, 2018.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2018
December	31	Depreciation Expense–Building (1)			20,000
		Depreciation Expense–Equipment (2)			4,500
		Amortization Expense			2,000
			Accumulated Depreciation–Building			20,000
			Accumulated Depreciation–Equipment			4,500
			Accumulated Amortization (3)			2,000
		(To record the depreciation expense and amortization expense)

Table (6)

Description:

• Depreciation expense is an expense account and it is increased by $20,000. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit depreciation expenses account with $20,000.
• Depreciation expense is an expense account and it is increased by $4,500. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit depreciation expenses account with $4,500.
• Amortization expense is an expense account and it is increased by $2,000. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit amortization expenses account with $2,000.
• Accumulated depreciation–Building is a contra-asset account and would have a normal credit balance. Therefore, credit accumulated depreciation account with $20,000.
• Accumulated depreciation– equipment is a contra-asset account and would have a normal credit balance. Therefore, credit accumulated depreciation account with $4,500.
• Accumulated amortization is a contra-asset account and would have a normal credit balance. Therefore, credit accumulated amortization account with $2,000.

Working note (1):

Determine the depreciation expense for building under double-declining-balance method, if cost of building is $100,000, useful life is 10 years, and accumulated depreciation is $0.

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense}\end{array}\}=\text{Depreciable cost × Depreciation rate}\\ \text{= }\left(\text{Cost–Accumulated depreciation}\right)\text{×}\frac{2}{\text{Useful life}}\\ =\left(\$100,000–\$0\right)\times \frac{2}{\text{10 years}}\\ =\$20,000\end{array}$

Working note (2):

Determine the depreciation expense for equipment for 9 months (April 1 to December 31) under straight-line method, if cost of equipment is $38,000, useful life is 5 years, and residual value is $8,000.

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense}\end{array}\}=\left(\text{Cost–Residual value}\right)\text{×}\frac{1}{\text{Useful life}}\times \text{Time period }\\ =\left(\$38,000–\$8,000\right)\times \frac{1}{\text{5 years}}\times \frac{9}{12}\\ =\$4,500\end{array}$

Working note (3):

Determine amortization expense for 6 months (from July 1 to December 31), if cost of patent is $20,000, and useful life is 5 years.

$\begin{array}{c}\text{Amortization expense =}\left\{\begin{array}{l}\text{Cost of intangible asset}\text{×}\\ \frac{\text{1}}{\text{Useful life}}\text{× Time period}\end{array}\right\}\\ \text{= \$20,000 × }\frac{\text{1}}{\text{5 years}}\times \frac{6}{12}\\ \text{= \$2,000}\end{array}$

Prepare journal entry for the depreciation expense as on June 30, 2019.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2019
June	30	Depreciation Expense–equipment (4)			3,000
			Accumulated Depreciation–equipment			3,000
		(To record the depreciation expense)

Table (7)

Description:

• Depreciation expense is an expense account and it is increased by $3,000. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit depreciation expenses account with $3,000.
• Accumulated depreciation– equipment is a contra-asset account and would have a normal credit balance. Therefore, credit accumulated depreciation account with $3,000.

Working note (4):

Determine the depreciation expense for equipment for 6 months (December 31, 2018 to June 30, 2019) under straight-line method, if cost of equipment is $38,000, useful life is 5 years, and residual value is $8,000.

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense}\end{array}\}=\left(\text{Cost–Residual value}\right)\text{×}\frac{1}{\text{Useful life}}\times \text{Time period }\\ =\left(\$38,000–\$8,000\right)\times \frac{1}{\text{5 years}}\times \frac{6}{12}\\ =\$3,000\end{array}$

Prepare journal entry for the sale of truck on June 30, 2019.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2019
June	30	Cash			33,000
		Accumulated Depreciation–Equipment			7,500
			Equipment			38,000
			Gain on Disposal (6)			2,500
		(To record the sale of truck)

Table (8)

Description:

• Cash is an asset and it is increased by $33,000. Therefore, credit the cash account with $33,000.
• Accumulated depreciation– equipment is a contra-asset account and would have a normal credit balance. Since the equipment is sold, the accumulated depreciation balance is reversed to reduce the equipment account balance. Hence, the accumulated depreciation account is debited with 7,500.
• Equipment is an asset and it is decreased by $38,000. Therefore, credit the equipment account with $38,000.
• Gain on disposal is a revenue account and it is increased by $2,500. Revenues are the component of stockholder’s equity and it increases the value of equity. Therefore, debit gain on disposal account with $2,500.

Working note (5):

Determine the gain on sale.

Compute book value on the date of sale.

$\begin{array}{c}\text{Book value = Cost–Accumulated depreciation}\\ \text{= \$38,000–\$7,500}\\ \text{= \$30,500}\end{array}$

Working note (6):

Compute gain on sale.

$\begin{array}{c}\text{Gain = Sale proceeds – Book value}\\ \text{= \$33,000 – \$30,500 (5)}\\ \text{= \$2,500}\end{array}$

Prepare journal entry for the depreciation expense as on December 31, 2019.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2019
December	31	Depreciation Expense–Building (7)			16,000
			Accumulated Depreciation–Building			16,000
		(To record the depreciation expense)

Table (9)

Description:

• Depreciation expense is an expense account and it is increased by $16,000. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit depreciation expenses account with $16,000.
• Accumulated depreciation–building is a contra-asset account and would have a normal credit balance. Therefore, credit accumulated depreciation account with $16,000.

Working note (7):

Determine the depreciation expense for building under double-declining-balance method, if cost of building is $100,000, useful life is 10 years, and accumulated depreciation is $20,000.

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense}\end{array}\}=\text{Depreciable cost×Depreciation rate}\\ \text{= }\left(\text{Cost–Accumulated depreciation}\right)\text{×}\frac{2}{\text{Useful life}}\\ =\left(\$100,000–\$20,000\right)\times \frac{2}{\text{10 years}}\\ =\$16,000\end{array}$

Prepare journal entry for the impairment loss as on December 31, 2019.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2019
December	31	Impairment Loss (8)			18,000
			Patent			18,000
		(To record the impairment loss)

Table (10)

Description:

• Impairment Loss is an expense account and it is increased by $18,000. Expenses are the component of stockholder’s equity and it decreases the value of equity. Therefore, debit impairment loss account with $18,000.
• A patent is an asset and it is decreased by $18,000. Therefore, debit the patent account with $18,000.

Working note (8):

Compute impairment loss, if cost of patent is $20,000, and accumulated amortization is $2,000 (Refer to Table 6).

$\begin{array}{c}\text{Impairment loss = Patent cost – Accumulated amortization}\\ \text{=\$20,000 – \$2,000}\\ \text{=\$18,000}\end{array}$