E8-4 Determining Financial Statement Effects of an Asset Acquisition and Depreciation

Ashkar Company ordered a machine on January 1, 2013, at an invoice price of $21,000. On the
date of delivery, January 2, 2013, the company paid $6,000 on the machine, with the balance on
credit at 10 percent interest due in six months. On January 3, 2013, it paid $1,000 for freight on
the machine. On January 5, Ashkar paid installation costs relating to the machine amounting to
$2,500. On July 1, 2013, the company paid the balance due on the machine plus the interest. On
December 31, 2013 (the end of the accounting period), Ashkar recorded depreciation on the
machine using the straight-line method with an estimated useful life of 10 years and an estimated
residual value of $4,000.
Required:
1. Indicate the effects (accounts, amounts, and + or ) of each transaction on the accounting
equation. Use the following schedule: (If the transaction does not impact the accounting
equation choose "No effect" in the first column under "Assets".)

Date Assets = Liabilities + Stockholders Equity

January 1 No effect

Short term note

January 2 Cash -6,000 15,000
payable
Equipment 21,000
January 3 Cash -1000
Equipment +1000
January 5 Cash -2500
Equipment 2500
Short term note
July 1 Cash -15750 -15000 Interest Expense 750
payable

2. Compute the acquisition cost of the machine.

Acquisition Cost of the Machine

Cash Paid 6000

Notes Payable Supplier 15000

Freight cost 1000
Installation Cost 2500
Acquisition cost $24500
 3. Compute the depreciation expense to be reported for 2013.

Depreciation expense 2050

4. What would be the net book value of the machine at the end of 2014? (Amounts to be
deducted should be indicated by a minus sign.)

Equipment 24500
Accumulated depreciation 4100
Net book value at end of 2014 20400

E8-5 Recording Depreciation and Repairs (Straight-Line Depreciation)

Hulme Company operates a small manufacturing facility as a supplement to its regular service
activities. At the beginning of 2014, an asset account for the company showed the following
balances:
Manufacturing equipment $ 120,000
Accumulated depreciation through 2013 57,600

During 2014, the following expenditures were incurred for the equipment:
Routine maintenance and repairs on the equipment $ 1,000
Major overhaul of the equipment that improved efficiency on January 2, 2014 13,000

The equipment is being depreciated on a straight-line basis over an estimated life of 15 years
with a $12,000 estimated residual value. The annual accounting period ends on December 31.
Required:
1. Prepare the adjusting entry that was made at the end of 2013 for depreciation on the
manufacturing equipment.
General Journal Debit Credit
Depreciation expense (+E, -SE) 7,200
Accumulated depreciation (+XA, -A) 7,200
2. Starting at the beginning of 2014, what is the remaining estimated life?

Remaining life 7 years

3. Prepare the journal entries to record the two expenditures during 2014.
Transaction General Journal Debit Credit
1 Repair and maintenance expense (+E, SE) 1,000
Cash (A) (Ordinary Reapir) 1,000
 2 Equipment (+A) 13,000
Cash (A) (Improvements ) 13,000

2
E8-11 Computing Depreciation and Book Value for Two Years Using Alternative Depreciation
Methods and Interpreting the Impact on Cash Flows
Schrade Company bought a machine for $96,000 cash. The estimated useful life was four years,
and the estimated residual value was $6,000. Assume that the estimated useful life in productive
units is 120,000. Units actually produced were 43,000 in year 1 and 45,000 in year 2.
Required:
1. Determine the appropriate amounts to complete the following schedule. (Do not round
your intermediate calculations.)
Depreciation Expense for Net Book Value at the End of
Method of Depreciation Year 1 Year 2 Year 1 Year 2
Straight-line 22,500 22,500 73,500 51,000
Units-of-production 32,250 33,750 63,750 30,000
Double-declining-balance 48,000 24,000 48,000 24,000

2a. Which method would result in the lowest EPS for year 1?
double-declining-balance method
2b. Which method would result in the lowest EPS for year 2?

units-of-production method

2c. Which method would result in the highest amount of cash outflows in year 1?
Since the straightline method results in lowest expense, and therefore the highest net
income, hence it also has the highest tax liability, and as a result will have the highest amount of
cash outflows in 1st year.
E8-14 Recording the Disposal of an Asset at Three Different Sale Prices
Marriott International is a worldwide operator and franchisor of hotels and related lodging
facilities totaling over $1.1 billion in property and equipment. It also develops, operates, and
markets time-share properties totaling nearly $2 billion. Assume that Marriott replaced furniture
that had been used in the business for five years. The records of the company reflected the
following regarding the sale of the existing furniture.
Furniture (cost) $ 8,000,000
Accumulated depreciation 7,700,000
Required:
1. Prepare the journal entry for the disposal of the furniture, assuming that it was sold for:
a. $300,000 cash
b. $900,000 cash
c. $100,000 cash
Transaction General Journal Debit Credit
a.
Cash (+A) 300,000
Accumulated depreciation (XA, +A) 7,700,000
Furniture (A) 8,000,000

The asset was sold at book value, hence no loss or, no gain.

b.
Cash (+A) 900,000
Accumulated depreciation (XA, +A) 7,700,000
Gain on sale of long-lived asset (+Gain, +SE) 600,000
Furniture (A) 8,000,000
Sale of an asset above book value, hence the result is a gain.
C
Cash (+A) 100,000
Accumulated depreciation (XA, +A) 7,700,000
Loss on sale of long-lived asset (+Loss, SE) 200,000
Furniture (A) 8,000,000

Sale of an asset below book value, hence the result is a loss.

P8-6 Recording and Interpreting the Disposal of Three Long-Lived Assets

During 2015, Merkley Company disposed of three different assets. On January 1, 2015, prior to
their disposal, the accounts reflected the following:
Asset Original Residual Estimated Accumulated Depreciation
Cost Value Life (straight line)
Machine A $21,000 $3,000 8 years $15,750 (7 years)
Machine B 50,000 4,000 10 years 36,800 (8 years)
Machine C 85,000 5,000 15 years 64,000 (12 years)

The machines were disposed of in the following ways:

a. Machine A: Sold on January 1, 2015, for $5,000 cash.
b. Machine B: Sold on December 31, 2015, for $10,500; received cash, $2,500, and a $8,000
interest-bearing (12 percent) note receivable due at the end of 12 months.
c. Machine C: On January 1, 2015, this machine suffered irreparable damage from an accident.
On January 10, 2015, a salvage company removed the machine at no cost.
Required: Give all journal entries related to the disposal of each machine in 2015.
a. Machine A.

(1) Depreciation expense in 2015 - none recorded because disposal date was Jan. 1, 2015.

(2)
To record disposal Cash (+A) 5,000
Accumulated depreciation Machine A (XA, +A) 15,750
Loss disposal of machine (+L, SE) 250
Equipment (A) 21,000

b. Machine B.

1. depreciation expense
Depreciation expense (+E, SE) 4,600
Accumulated depreciation, Machine B (+XA, A) 4,600

2. disposal: Cash (+A) 2,500

Note receivable (+A) 8,000
Accumulated depreciation (XA, +A) 41,400
Gain on disposal of machine (+Gain, +SE) 1,900
Equipment (A) 50,000

c. Machine C.

1 Depreciation expense in 2015 nothing should be recorded as the disposal date was Jan 1, 2015

(2) To record disposal:

Accumulated depreciation (XA, +A) 64,000

Loss on disposal of machine (+Loss, SE) 21,000

Equipment (Machine C) (A) 85,000