Problem 9-3A On January 1, 2019, Novak Company purchased the following two machi

Question

Problem 9-3A On January 1, 2019, Novak Company purchased the following two machines for use in its production process. Machine A: The cash price of this machine was $53,500. Related expenditures included: sales tax $3,650, shipping costs $200, insurance during shipping $100, installation and testing costs $60, and $150 of oil and lubricants to be used with the machinery during its first year of operations. Novak estimates that the useful life of the machine is 5 years with a $4,400 salvage value remaining at the end of that time period. Assume that the straight-line method of depreciation is used. Machine B: The recorded cost of this machine was $180,000. Novak estimates that the useful life of the machine is 4 years with a $10,200 salvage value remaining at the end of that time period. Prepare the following for Machine A. (Round answers to O decimal places, e.g. 2,125. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter O for the amounts.) 1. The journal entry to record its purchase on January 1, 2019 2. The journal entry to record annual depreciation at December 31, 2019 No. Account Titles and Explanation 1. Debit 2.

Explanation / Answer

Machine A

Calculation of cost of machinery

Cost of machinery include non refundable taxes and other costs incurred in bringing the machinery to its location and makimg it operative in an effective manner.

Note 1 - Assume sales tax cost is refundable cost

Note 2 - oil and lubricanting cost is revenue expenditure and is not capital expenditure since it it not directly attributable cost and also such cost is incurred for first year run of the machine and is not incurred with object of bringing the asset to its location and making its operative as intended by management

Calculation of depreciation as per straight line method

Depreciation amount (cost - salvage value)/Estimated life

($53860-$4400)/5

Journal entry for depreciation

Machine B

Calculation of depreciation

Depreciation for year 2019 = ($180000-$10200)*52500/154450

Double declining method of depreciation

Salvage value amount is not considered in double declining method

Rate under double declining method = (1/4year*100) *2 = 50%

Analysis

A) In year 1, Depreciation under double declining method is highest than other method i.e. $90000

B) Highest depreciation in year 4 is as per straight line method i.e. 42450

C) highest total depreciation charges over the 4 years is under straight line method and double declining method i.e. $169800

Particulars Amount Purchase price $53500 Shipping $200 Insurance $100 Installation and testing costs $60 Total cost $53860

Note 1 - Assume sales tax cost is refundable cost

Note 2 - oil and lubricanting cost is revenue expenditure and is not capital expenditure since it it not directly attributable cost and also such cost is incurred for first year run of the machine and is not incurred with object of bringing the asset to its location and making its operative as intended by management

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