oo Verizon LTE 10:49 PM ) 2496 [O + ezto.mheducation.com Nicholas Piloco O\'Conn
ID: 2580570 • Letter: O
Question
oo Verizon LTE 10:49 PM ) 2496 [O + ezto.mheducation.com Nicholas Piloco O'Connor Company ordered a machine on January 1 at a purchase price of $10,000. On the date of delivery, January 2 company paid $3,000 on the machine “d signed a long- erm note payable for the balance On January 3, it paid $100 for freight on the machine. On January 5, O Connor paid cash for instaliation costs relating to the machine amounting to $600 On December 31 (the end of the accounting period) O'Connor method with an esimated useful ide of 10 years and an estimated residual value of $1,100 Required ndicate the effects (accounts, amounts, andfor increase for 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 a Compute the acquisition cost of the machine Compute the depreciation expense to be reported for the first What should be the book value of the machine at the end of he second year? D not round intermediateExplanation / Answer
1) On January 1, O Connor Company ordered the machine at purchase price of $10,000. Since company has just ordered the machine therefore it will not impact the accounting equation.
On January 2, Company paid $3,000 in cash for machine and signed a notes payable for balance i.e. $7,000. The effect of this transaction will be that cash will get reduce by $3,000 and machine worth $10,000 will increase on assets side. On other hand, notes payable is signed with $7,000 which is liability for company. So, it will be added on liability side. There is no impact on Shareholder's equity of this transaction.
On January 3, $100 is paid for freight on machine. Since, this is acquisition cost of machine therefore it will be included in machine. Therefore, cash will get reduce by $100 and machine will be added up by $100 on assets side.
On January 5, $600 is paid as installation cost for machine. Since, this is acquisition cost of machine therefore it will be included in machine. Therefore, cash will get reduce by $600 and machine will be added up by $600 on assets side.
The effect of each transaction on accounting equation is as follows:
Shareholder'sequity
2) The cost of asset include all amounts paid to acquire the asset and to prepare it for its intended purpose. Therefore, the acquisition cost of machine will include purchase price, freight cost and installation cost of machine. Therefore, total acquisition cost of machine will be as follows:
Acquisition cost of machine = Purchase price + freight cost + installation cost
Acquisition cost of machine = $10,000 + $100 + $600
Acquisition cost of machine = $10,700
3) Depreciation is the process of allocating a fixed assets cost to expense over its useful life. With passage of time assets value keep on reducing due to usage and wear & tear. It does not represent a cash transaction, but it indicates how much of an asset's value has been used up over time.
Straight line depreciation method allocates an equal amount of depreciation to each year. The equation to find yearly depreciation is as follows:
Straight line depreciation = (Cost - Residual value) / Estimated useful life in years
As calculated above acquisition cost of machine is $10,700 having useful life of 10 years and residual value is $1,100. Therefore, as per straight line depreciation method, the depreciation per year will be as follows:
Straight line depreciation = ($10,700-$1,100) / 10
Straight line depreciation = $960
So, depreciation expense to be reported on machine for first year is $960 per year.
4) Book value of machine means the value at which machine will be shown in balance sheet at end of year. It is calculated by subtracting the accumulated depreciation on asset from its cost. It is also know as net vakue of asset.
The book value of machine at the end of second year will be calculated by subtracting accumulated depreciation on machine (for 2 years) from cost of machine.
Accumulated depreciation on machine for 2 years = $960 * 2
Accumulated depreciation on machine for 2 years = $1,920.
Therefore, book value of machine after 2 years will be as follows:
Book value of machine = Acquisition cost - Accumulated depreciation on machine for 2 years
Book value of machine = $10,700 - $1,920
Book value of machine = $8,780
Therefore, book value of machine after 2 years will be $8,780.
Date Assets Amount = Liabilities Amount +Shareholder'sequity
Amount Jan 1 $0 = $0 + $0 Jan 2 Cash -$3000 = Notes payable $7,000 + $0 Machine $10,000 = + $0 Jan 3 Cash -$100 = + $0 Machine $100 = + $0 Jan 5 Cash -$600 = + $0 Machine $600 = + $0Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.