O\'Connor Company ordered a machine on January 1 at a purchase price of $120,000
ID: 2568467 • Letter: O
Question
O'Connor Company ordered a machine on January 1 at a purchase price of $120,000. On the date of delivery January 2, the company paid $30,000 on the machine and signed a long term note payable for the balance On January 3, it paid $1,200 for freight on the machine On January 5, O'Connor paid cash fo installation costs relating to the machine amounting to S7,200. On December 31 (the end of the accounting period), O'Connor recorded depreciation on the machine using the straight-line method with an estimated useful life of 10 years and an estimated residual value of $12,800 Required 1. Indicate the ellects (accounts, amounts, and for increase or decrease) of each transaction (on January 1, 2, 3, and 5) on the accounting equation. (Enter any decreases to account balances with a minus sign.) Assets Date Jan 01 Jan 02 Liabilities Stockholders' Equity Jan 03 an 05Explanation / Answer
(1).
Date
Assets
=
Liabilities
+
Shareholders’ Equity
Jan. 01
No effect
No effect
No effect
Jan. 02
Cash – $30000
Long-term note payable $90000
No effect
Machine $120000
Jan. 03
Cash – $1200
Machine $1200
No effect
No effect
Jan. 05
Cash – $7200
No effect
No effect
Machine $7200
Dec. 31
Accumulated depreciation – $11560
No effect
Net income – $11560
(2).
Acquisition cost of the machine;
Acquisition cost of the machine will be calculated as follow;
($120000 + $1200 + $7200) = $128400
(3).
Depreciation expense for the first year;
Acquisition cost of the machine is = $128400
Useful life = 10 years
Residual value = $12800
Thus amount of depreciation expense will be calculated as follow;
($128400 – $12800) / 10
= $115600 / 10
= $11560
(4).
Book value of the machine at the end of second year;
Acquisition cost of the machine is = $128400
Annual depreciation = $11560
Thus book value of the machine at the end of second year will be calculated as follow;
($128400 – $11560 – $11560)
= $105280
Note:
Depreciation will be deducted for two years because book value is asked at the end of second year.
Date
Assets
=
Liabilities
+
Shareholders’ Equity
Jan. 01
No effect
No effect
No effect
Jan. 02
Cash – $30000
Long-term note payable $90000
No effect
Machine $120000
Jan. 03
Cash – $1200
Machine $1200
No effect
No effect
Jan. 05
Cash – $7200
No effect
No effect
Machine $7200
Dec. 31
Accumulated depreciation – $11560
No effect
Net income – $11560
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