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Chapter 10: Q14BE. (page 532)

Ottawa Corporation owns machinery that cost \(20,000 when purchased on July 1, 2014. Depreciation has been recorded at a rate of \)2,400 per year, resulting in a balance in accumulated depreciation of \(8,400 at December 31, 2017. The machinery is sold on September 1, 2018, for \)10,500. Prepare journal entries to (a) update depreciation for 2018 and (b) record the sale.

Short Answer

Expert verified

There is a gain on disposal of machine of $500.

Step by step solution

01

Updating depreciation

Depreciation per year = $2,400

The time period from last accumulated depreciation date till sale = 8 months

Depreciationexpensefortheperiod=Peryeardepreciation12脳No.ofperiod=$2,40012脳8=$1,600

Journal Entry

Date

Description

Debit

Credit

1, Sept, 2018

Depreciation Expense

$1,600

Accumulated Depreciation

$1,600

Being depreciation updated

TotalAccumulateddepreciation=Lastaccumulateddepreciation+Updateddepreciation=$8,400+$1,600=$10,000

02

Recording of sale

Journal Entry

Date

Description

Debit

Credit

1, Sept, 2018

Cash

$10,500

Accumulated Depreciation

$10,000

Machine

$20,000

Gain on disposal(balancing figure)

$500

Being old machine disposed

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Most popular questions from this chapter

(Capitalization of Interest) The following three situations involve the capitalization of interest

Situation I: On January 1, 2017, Oksana Baiul, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of \(4,000,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2017, to finance the construction cost, Oksana Baiul borrowed \)4,000,000 payable in 10 annual installments of \(400,000, plus interest at the rate of 10%. During 2017, Oksana Baiul made deposit and progress payments totaling \)1,500,000 under the contract; the weighted average amount of accumulated expenditures was \(800,000 for the year. The excess borrowed funds were invested in short-term securities, from which Oksana Baiul realized investment income of \)250,000.

Instructions

What amount should Oksana Baiul report as capitalized interest at December 31, 2017?

Situation II: During 2017, Midori Ito Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities.

Interest Costs Incurred

Warehouse constructed for Ito鈥檚 own use

\(30,000

Special-order machine for sale to unrelated customer, produced according to customer鈥檚 specifications

9,000

Inventories routinely manufactured, produced on a repetitive basis

8,000

All of these assets required an extended period of time for completion.

Instructions

Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?

Situation III: Peggy Fleming, Inc. has a fiscal year ending April 30. On May 1, 2017, Peggy Fleming borrowed \)10,000,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2018, expenditures for the partially completed structure totaled \(7,000,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to \)650,000 for the year.

Instructions

How much should be shown as capitalized interest on Peggy Fleming鈥檚 financial statements on April 30, 2018?

Crowe Company purchased a heavy-duty truck on July 1, 2014, for \(30,000. It was estimated that it would have a useful life of 10 years and then would have a trade-in value of \)6,000. The company uses the straight-line method. It was traded on August 1, 2018, for a similar truck costing \(42,000; \)16,000 was allowed as trade-in value (also fair value) on the old truck and $26,000 was paid in cash. A comparison of expected cash flows for the trucks indicates the exchange lacks commercial substance. What is the entry to record the trade-in?

Navajo Corporation traded a used truck (cost \(20,000, accumulated depreciation \)18,000) for a small computer with a fair value of \(3,300. Navajo also paid \)500 in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)

Question: (Entries for Equipment Acquisitions) Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of \(10,000. Presented below are three independent cases related to the equipment. (Round to the nearest dollar.)

  1. Geddes paid cash for the equipment 8 days after the purchase. The vendor鈥檚 credit terms are 2/10, n/30. Assume that equipment purchases are initially recorded gross.
  2. Geddes traded in equipment with a book value of \)2,000 (initial cost \(8,000), and paid \)9,500 in cash one month after the purchase. The old equipment could have been sold for \(400 at the date of trade. (The exchange has commercial substance.)
  3. Geddes gave the vendor a \)10,800 zero-interest-bearing note for the equipment on the date of purchase. The note was due in one year and was paid on time. Assume that the effective-interest rate in the market was 9%.

Instructions

Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.

Question: Stan Ott is evaluating two recent transactions involving exchanges of equipment. In one case, the exchange has commercial substance. In the second situation, the exchange lacks commercial substance. Explain to Stan the differences in accounting for these two situations.
See all solutions

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