Chapter 9, Problem 9.4PA

To determine

To prepare: Journal entries in the books of International GG

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, 2015.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2015
January	2	Building			95,000
			Cash			95,000
		(To record purchase of building)

Table (1)

Description:

• Building is an asset account. Since building 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.

Prepare journal entry for the transaction occurred on January 3, 2015.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2015
January	3	Building			5,000
			Cash			5,000
		(To record purchase of building)

Table (2)

Description:

• Building is an asset account. Since building 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.

Prepare journal entry for the transaction occurred on April 1, 2015.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2015
April	1	Equipment			38,000
			Cash			38,000
		(To record purchase of equipment)

Table (3)

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.

Prepare journal entry for the transaction occurred on May 13, 2015.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2015
May	13	Repairs and Maintenance Expense			250
			Cash			250
		(To record payment of expense)

Table (4)

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.

Prepare journal entry for the transaction occurred on April 1, 2015.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2015
April	1	Patents			20,000
			Cash			20,000
		(To record purchase of patents)

Table (5)

Description:

• Patent is an asset account. Since patents 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.

Prepare journal entry for the depreciation expense and amortization expense as on December 31, 2015.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2015
December	31	Depreciation Expense–Building			20,000
		Depreciation Expense–Equipment			4,500
		Amortization Expense			2,000
			Accumulated Depreciation–Building			20,000
			Accumulated Depreciation–Equipment			4,500
			Accumulated Amortization			2,000
		(To record depreciation expense and amortization expense)

Table (6)

Description:

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

Working Notes:

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

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

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

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

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, 2016.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2016
June	30	Depreciation Expense–Equipment			3,000
			Accumulated Depreciation–Equipment			3,000
		(To record depreciation expense)

Table (7)

Description:

• Depreciation Expense–Equipment 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.

Working Notes:

Determine the depreciation expense for equipmentfor 6 months (December 31, 2015 to June 30, 2016) under straight-linemethod, if cost of equipment is $38,000, useful life is 5 years, and residual value is $8,000.

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

Prepare journal entry for the sale of truck on June 30, 2016.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2016
June	30	Cash			33,000
		Accumulated Depreciation–Equipment			7,500
			Equipment			38,000
			Gain on Disposal			2,500
		(To record sale of truck)

Table (8)

Description:

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Accumulated Depreciation–Equipment is a contra-asset account. Since the equipment is sold, the accumulated depreciation balance is reversed to reduce the balance in the account, hence, the account is debited.
• Equipment is an asset account. Since equipment is sold, asset account decreased, and a decrease in asset is credited.
• Gain on Disposal is a revenue account. Since gains and revenues increase equity, equity value is increased, and an increase in equity is credited.

Working Notes:

Determine the gain on sale.

Step 1: Compute book value on the date of sale.

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

Step 2: Compute gain on sale.

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

Prepare journal entry for the depreciation expense as on December 31, 2016.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2016
December	31	Depreciation Expense–Building			16,000
			Accumulated Depreciation–Building			16,000
		(To record depreciation expense)

Table (9)

Description:

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

Working Notes:

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

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

Prepare journal entry for the impairment loss as on December 31, 2016.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2016
December	31	Impairment Loss			18,000
			Patent			18,000
		(To record impairment loss)

Table (10)

Description:

• Impairment Loss is an expense account. Since losses and expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Patent is an asset account. Since patent value is written off, the value of asset is decreased, and a decrease in asset is credited.

Working Notes:

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

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