Chapter 9, Problem 9.4PB

To determine

To prepare: Journal entries in the books of F Delivery

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			175,000
			Cash			175,000
		(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 July 3, 2015.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2015
July	3	Equipment			40,000
			Cash			40,000
		(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.

Prepare journal entry for the transaction occurred on October 2, 2015.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2015
October	2	Repairs and Maintenance Expense			500
			Cash			500
		(To record payment of expense)

Table (3)

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 October 13, 2015.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2015
October	13	Repairs and Maintenance Expense			150
			Cash			150
		(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 December 1, 2015.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
2015
December	1	Franchise Rights			90,000
			Cash			90,000
		(To record purchase of franchise rights)

Table (5)

Description:

• Franchise Rights is an asset account. Since franchise 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.

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			17,500
		Depreciation Expense–Equipment			3,200
		Amortization Expense			1,500
			Accumulated Depreciation–Building			17,500
			Accumulated Depreciation–Equipment			3,200
			Accumulated Amortization			1,500
		(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 $175,000, useful life is 20 years, and accumulated depreciation is $0.

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense}\end{array}\}=\text{Depreciable cost }\text{× Depreciation rate}\\ \text{= }\left(\begin{array}{l}\text{Cost–}\\ \text{Accumulated depreciation}\end{array}\right)\text{×}\frac{2}{\text{Useful life}}\\ =\left(\$175,000–\$0\right)\times \frac{2}{\text{20 years}}\\ =\$17,500\end{array}$

Determine the depreciation expense for equipmentfor 6 months (July 1 to December 31) under straight-linemethod, if cost of equipment is $40,000, useful life is 5 years, and residual value is $8,000.

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense}\end{array}\}=\text{Depreciable cost }\text{× Depreciation rate}\\ \text{= }\left(\text{Cost–Residual value}\right)\text{×}\frac{1}{\text{Useful life}}\times \text{Time period }\\ =\left(\$40,000–\$8,000\right)\times \frac{1}{\text{5 years}}\times \frac{6}{12}\\ =\$3,200\end{array}$

Determine amortization expense for 1 month (from December 1 to December 31), if cost of franchise right is $90,000, and useful life is 5 years.

$\begin{array}{c}\text{Amortization expense =}\left\{\begin{array}{l}\text{Cost of intangible asset}\text{×}\\ \frac{\text{1}}{\text{Useful life}}\text{× Time period}\end{array}\right\}\\ \text{= \$90,000 × }\frac{\text{1}}{\text{5 years}}\times \frac{1}{12}\\ \text{= \$1,500}\end{array}$

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–Building			7,875
			Accumulated Depreciation–Building			7,875
		(To record depreciation expense)

Table (7)

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 buildingfor 6 months (December 31, 2015 to June 30, 2016) under straight-linemethod, if cost of building is $175,000, useful life is 20 years, and accumulated depreciation is $17,500.

$\begin{array}{c}\begin{array}{l}\text{Depreciation }\\ \text{expense}\end{array}\}=\text{Depreciable cost }\text{× Depreciation rate}\\ \text{= }\left(\begin{array}{l}\text{Cost–}\\ \text{Accumulated depreciation}\end{array}\right)\text{×}\frac{2}{\text{Useful life}}\\ =\left(\$175,000–\$17,500\right)\times \frac{2}{\text{20 years}}\times \frac{6}{12}\\ =\$7,875\end{array}$

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

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2016
June	30	Cash			140,000
		Accumulated Depreciation–Building			25,375
		Loss on Disposal			9,625
			Building			175,000
		(To record sale of building)

Table (8)

Description:

• Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
• Accumulated Depreciation–Building is a contra-asset account. Since the building is sold, the accumulated depreciation balance is reversed to reduce the balance in the account, hence, the account is debited.
• Loss on Disposal is an expense account. Since losses and expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
• Building is an asset account. Since building is sold, asset account decreased, and a decrease in asset is credited.

Working Notes:

Determine the gain on sale.

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

$\begin{array}{c}\text{Book value = Cost–Accumulated depreciation}\\ \text{= \$175,000–}\left(\$17,500+\$7,875\right)\\ \text{= \$149,625}\end{array}$

Step 2: Compute gain on sale.

$\begin{array}{c}\text{Gain = Sale proceeds – Book value}\\ \text{= \$140,000 – \$149,625}\\ \text{= \$9,625}\end{array}$

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

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2016
December	31	Depreciation Expense–Equipment			6,400
		Amortization Expense			18,000
			Accumulated Depreciation–Equipment			6,400
			Accumulated Amortization			18,000
		(To record depreciation expense and amortization expense)

Table (9)

Description:

• 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–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.

Note: Refer to Table (6) for all the values.