Morris Inc. recorded the following transactions over the life of a piece of equi

Question

Morris Inc. recorded the following transactions over the life of a piece of equipment purchased in 2018 Jan. 1, 2018 Purchased equipment for $14,300 cash. The equipment was estimated to have a five-year life and $5,940 salvage value and was to be depreciated using the straight-line method. Dec. 31, 2018 Recorded depreciation expense for 2018. Sept. 30, 2019 Undertook routine repairs costing $705 Dec. 31, 2019 Recorded depreciation expense for 2019. Jan. 1, 2020 Made an adjustment costing $2,600 to the equipment. It improved the quality of the output but did not affect the life and salvage value estimates. Dec. 31, 2020 Recorded depreciation expense for 2020. Jun. 1, 2021 Incurred $355 cost to oil and clean the equipment. Dec. 31, 2021 Recorded depreciation expense for 2021. Jan. 1, 2022 Had the equipment completely overhauled at a cost of $7,140. The overhaul was estimated to extend the total life to seven years. The salvage value did not change. Dec. 31, 2022 Recorded depreciation expense for 2022. Oct. 1, 2023 Received and accepted an offer of $15,800 for the equipment. Required a. Use a horizontal statements model like the following one to show the net effects of these transactions on the elements of the financial statements. The first event is recorded as an example b. Determine the amount of depreciation expense to be reported on the income statements for the years 2018 through 2022 c. Determine the book value (cost - accumulated depreciation) Morris will report on the balance sheets at the end of thee years 2018 through 2022 d. Determine the amount of the gain or loss Morris will report on the disposal of the equipment on October 1, 2023

Explanation / Answer

ASSETS = LIABILITIES + EQUITY NET INCOME STATEMENT OF CASH FLOWS JAN 1 2018 (+) / (-) = NA + NA NA IA DEC 31 2018 (-) = (-) + NA (-) OA SEPT 30 2019 (-) = NA + NA (-) OA DEC 31 2019 (-) = (-) + NA (-) OA JAN 1 2020 (+) / (-) = NA + NA NA IA DEC 31 2020 (-) = (-) + NA (-) OA JUNE 1 2021 (-) = NA + NA (-) OA DEC 31 2021 (-) = (-) + NA (-) OA JAN 1 2022 (-) = NA + NA (-) OA DEC 31 2022 (-) = (-) + NA (-) OA OCT 1 2023 (+) / (-) = NA + NA IA OCT 1 2023 DEPRECIATION AND BOOK VALUE DEPRECIATION ACC. DEP. BOOK VALUE (COST-ACC. DEP) REMARKS 2018 1672 1672 12628 COST 14300, SALVAGE VALUE 5940. SO DEP IS TAKEN AT 8360 FOR 5 YEAR 2019 1672 3344 10956 2020 2539 5883 11017 IMPROVEMENT OF 2600 , SPREAD OVER REMAINING 3 YEAR 2021 2539 8422 8478 2022 846 9268 7632 OVERHAULING EXP OF 7140, INCREASED LIFE TO 7 YEARS I.E. BY ANOTHER 2 YEARS SO DEP EFFECT IS FOR RMAINING 3 YEARS. THIS IS DONE BY ADDING ORIGINAL COST MINUS SALVAGE PLUS IMPROVEMENT OF 2600. THE RESULT IS 10960. FROM THIS, DEP UPTO 2021 , $ 8421 IS REDUCED. THE REMAING AMOUNT IS SPREAD OVER 3 YEARS WHICH IS THE REMAINING LIFE. GAIN OR LOSS ON OCT 1, 2023 Book Value 6898 This is determined by reducing de[ of $ 634 ( for 3 uarters of 2023) fro the book value of $ 7632 as on 31/12/2022 Sale price 15800 Gain 8902

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