Exercise 237 Mark’s Repair Service uses the straight-line method of depreciation

Question

Exercise 237

Mark’s Repair Service uses the straight-line method of depreciation. The company's fiscal year end is December 31. The following transactions and events occurred during the first three years.

Prepare the necessary entries. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

2016 July 1 Purchased equipment from the Equipment Center for $5,500 cash plus sales tax of $305, and shipping costs of $250. Nov. 3 Incurred ordinary repairs on computer of $240. Dec. 31 Recorded 2016 depreciation on the basis of a four-year life and estimated salvage value of $455. 2017 Dec. 31 Recorded 2017 depreciation. 2018 Jan. 1 Paid $1,800 for a major upgrade of the equipment. This expenditure is expected to increase the operating efficiency and capacity of the equipment. Date Account Titles and Explanation Debit Credit 2016 July 1 2016 Nov. 3 2016 Dec. 31 2017 Dec. 31 2018 Jan. 1

Explanation / Answer

Working Note :

1 Calculation of amount of equipment to be recorded :

Purchased value of equipment = $ 5,500

+ Sales tax = $ 305

+ Shipping costs = $ 250

Totals Cost of equipment = $ 6,055

2. Calculation of depreciation

Depreciation under straight line method = (Cost of Equipment - salvage value) / life of the equipment

= ( $ 6,055 - $ 455) / 4 years

= $ 1,400 each year

Date Account Titles Debit Credit 2016 july 1 Equipment A/c 6,055       To Cash A/c 6,055 ( Being equipment purchased ) 2016 Nov 3 Repair A/c            240        To cash A/c            240 ( Being computer repaired ) 2016 Dec 31 Depreciation A/c         1,400       To Equipment A/c         1,400 ( Being depreciation chagred ) 2017 Dec 31 Depreciation A/c         1,400       To Equipment A/c         1,400 ( Being depreciation chagred ) 2018 Jan 1 Equipment A/c         1,800       To Cash A/c         1,800 ( Being amount of major upgradation capitalized)

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