[The following information applies to the questions displayed below During Year
ID: 2547652 • Letter: #
Question
[The following information applies to the questions displayed below During Year 1, Ashkar Company ordered a machine on January 1 at an invoice price of $26,000. On the date of delivery, January 2, the company paid $7,000 on the machine, with the balance on credit at 10 percent interest due in six months. On January 3, it paid $1,300 for freight on the machine. On January 5, Ashkar paid installation costs relating to the machine amounting to $2,200. On July 1, the company paid the balance due on the machine plus the interest. On December 31 (the end of the accounting period), Ashkar recorded depreciation on the machine using the straight-line method with an estimated useful life of 10 years and an estimated residual value of $4,400.Explanation / Answer
Date
Assets
=
Liabilities
+
Shareholders Equity
January 1
No effect
No effect
No effect
January 2
Cash
-7,000
Short term notes payable
19,000
Equipment
26,000
January 3
Cash
-1,300
Equipment
+1,300
January 5
Cash
-2,200
Equipment
2,200
July 1
Cash
-19,950
Short term notes payable
-19,000
Interest expense
950
2. Compute the acquisition cost of the machine
Acquisition cost of the Machine
Cash paid
7,000
Notes payable
19,000
Freight cost
1,300
Installation cost
2,200
Acquisition cost
29,500
3. Compute the depreciation expense to be reported for year 1
Amount of depreciation = cost of asset - residual value/ Estimated useful life
= 29,500 – 4,400 / 10 = 2,510
4. What would be the net book value of the machine at the end of year 2
Cost of asset
29,500
Depreciation for Year 1
2,510
Depreciation for Year 2
2,510
Book value at end year 2
24,480
Date
Assets
=
Liabilities
+
Shareholders Equity
January 1
No effect
No effect
No effect
January 2
Cash
-7,000
Short term notes payable
19,000
Equipment
26,000
January 3
Cash
-1,300
Equipment
+1,300
January 5
Cash
-2,200
Equipment
2,200
July 1
Cash
-19,950
Short term notes payable
-19,000
Interest expense
950
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