On April 1, 2014, the KB Toy Company purchased equipment to be used in its manuf

Question

On April 1, 2014, the KB Toy Company purchased equipment to be used in its manufacturing process. The equipment cost $59,800, has an ten-year useful life, and has no residual value. The company uses the straight-line depreciation method for all manufacturing equipment. On January 4, 2016, $14,750 was spent to repair the equipment and to add a feature that increased its operating efficiency. Of the total expenditure, $3,200 represented ordinary repairs and annual maintenance and $11,550 represented the cost of the new feature. In addition to increasing operating efficiency, the total useful life of the equipment was extended to 12 years.

1. Prepare journal entries for the depreciation for 2014 and 2015.

2. Prepare journal entries for the 2016 expenditure.

Explanation / Answer

1) Straight line depreciation = $59800 / 10 = $5980 per year

Journal Entry:

Dec 31, 2014

Depreciation..............................................Dr. $4485

Accumulated depreciation............................................Cr. $4485

Dec 31, 2015

Depreciation..............................................Dr. $5980

Accumulated depreciation............................................Cr. $5980

2)

Repairing expenses...............................Dr. $3200

Equipment............................................Dr. $11550

Cash..................................................................Cr. $14750

($11550, has been debited to equipment account, as it has increased the operating efficiency as well as the useful life of the asset, thereby qualifying for capital expenditure)

Remaining useful life of the re-valued asset = 12 - 2 = 10 years

Straight line depreciation = $60885 / 10 = $6089

Depreciation ......................................Dr. $6089

Accumulated depreciation.................................Cr. $6089

Cost $ 59,800.00 Less: depreciation for 9 months for the year 2014 $   4,485.00 $ 55,315.00 Less: depreciation for the year 2015 $   5,980.00 Book Value as on Jan1, 2016 $ 49,335.00

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