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Chapter 10: Problem 16

Crane Company purchased and installed carpet in its new general offices on March 30 for a total cost of $12,000. The carpet is estimated to have a 15-year useful life and no residual value. a. Prepare the journal entries necessary for recording the purchase of the new carpet. b. Record the December 31 adjusting entry for the partial-year depreciation expense for the carpet, assuming that Crane Company uses the straight-line method.

Short Answer

Expert verified
The carpet purchase is recorded by debiting "Carpet" and crediting "Cash" for $12,000. The adjusting entry on December 31 records $600 in depreciation using the straight-line method.

Step by step solution

01

Journal Entry for Carpet Purchase

To record the purchase of carpet, we need to debit the asset account and credit the cash or accounts payable account. The entry on March 30 is: - Debit "Carpet" (or "Office Furnishings") for $12,000 - Credit "Cash" for $12,000 The journal entry will look like this: | Date | Account | Debit | Credit | |-----------|------------------------|--------|--------| | Mar 30 | Carpet | 12,000 | | | | Cash | | 12,000 |
02

Calculate Depreciation Period

The carpet was purchased on March 30 and the depreciation needs to be calculated from that point until December 31. To find the number of months for depreciation, count from April to December, which gives us 9 months of use in the year.
03

Calculate Annual Depreciation

Use the straight-line depreciation method formula:\[\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} = \frac{12,000 - 0}{15} = 800\]This means the carpet depreciates by $800 per year.
04

Calculate Partial Year Depreciation

Since the carpet was not used the entire year, calculate the depreciation for 9 months:\[\text{Partial-Year Depreciation} = \text{Annual Depreciation} \times \frac{9}{12} = 800 \times \frac{9}{12} = 600\]So, the depreciation expense for the 9 months is $600.
05

Prepare Adjusting Journal Entry for Depreciation

Now, record the adjusting entry to reflect the depreciation expense by December 31: - Debit "Depreciation Expense" for $600 - Credit "Accumulated Depreciation - Carpet" for $600 The adjusting journal entry on December 31 will be: | Date | Account | Debit | Credit | |-----------|------------------------------------|--------|--------| | Dec 31 | Depreciation Expense | 600 | | | | Accumulated Depreciation - Carpet | | 600 |

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Journal Entries
When a company purchases an asset, like new carpet for an office, it records that transaction using a journal entry. This journal entry method captures financial transactions systematically. It involves at least two accounts鈥攁 debit to one account and a credit to another鈥攅nsuring that the total debits equal total credits. This keeps the accounting equation balanced.
For instance, Crane Company purchased carpet on March 30 for $12,000. The journal entry would record this by:
  • Debiting the 'Carpet' account for $12,000, which increases the asset value in the company's books.
  • Crediting the 'Cash' account for $12,000, reflecting the outflow of cash to pay for the carpet.
Each entry captures both what the company gains (the carpet) and what it loses (the cash), offering a complete picture of each transaction.
Depreciation Calculation
Depreciating an asset means allocating its cost over its useful life. It ensures that the expense is recorded in the same period as the revenues it helps generate. For calculation, the straight-line depreciation method is simple and commonly used.
The straight-line method divides the asset's cost evenly across its useful life span, using the formula:\[\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}\]Applying this to the carpet, with a cost of \(12,000, a 15-year useful life, and no residual value:
  • Annual Depreciation = \(\frac{12,000}{15} = 800\)
This means the carpet depreciates by \)800 every year. This systematic calculation provides consistent cost allocation over time.
Asset Purchase
Buying a long-term asset, like office carpet, is a critical business transaction. It involves deciding whether the expenditure is for a current or capital asset. Current assets are consumed within a short period, while capital assets, such as the carpet, provide benefits over an extended period.
The purchase involves a significant cash outlay or obligation to pay in the future. With Crane Company, the purchase on March 30 involved a one-time cash outflow of $12,000. The cost reflects in the company鈥檚 balance sheet as an increase in asset value.
Adjusting Entries
Adjusting entries are crucial for presenting a company鈥檚 financial health accurately. They account for revenues and expenses that have occurred but aren鈥檛 yet recorded by the end of an accounting period. These are essential before financial statements are prepared.
For depreciation, the adjusting entry updates the company鈥檚 records to reflect the asset's diminished value. For the carpet, this involves an entry for the partial-year depreciation from April to December (9 months) of $600:
  • Debit 'Depreciation Expense' for $600, recording the cost of asset use.
  • Credit 'Accumulated Depreciation - Carpet' for $600, representing the total depreciation accumulated over time.
Such entries ensure expenses and income match the period they relate to, maintaining the integrity of financial records and reports.

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Most popular questions from this chapter

Jaime Baldwin owns and operates Love Transport Co. During the past year, Jaime incurred the following costs related to an 18-wheel truck: 1\. Changed engine oil. 2\. Installed a wind deflector on top of the cab to increase fuel mileage. 3\. Replaced fog and cab light bulbs. 4\. Modified the factory-installed turbo charger with a special-order kit designed to add 50 more horsepower to the engine performance. 5\. Replaced a headlight that had burned out. 6\. Removed the old CB radio and replaced it with a newer model with a greater range. 7\. Replaced the old radar detector with a newer model that detects the KA frequencies now used by many of the state patrol radar guns. The detector is wired directly into the cab, so that it is partially hidden. In addition, Jaime fastened the detector to the truck with a locking device that prevents its removal. 8\. Replaced the hydraulic brake system that had begun to fail during his latest trip through the Rocky Mountains. 9\. Installed a television in the sleeping compartment of the truck. 10\. Replaced a shock absorber that had worn out. Classify each of the costs as a capital expenditure or a revenue expenditure.

Convert each of the following estimates of useful life to a straight-line depreciation rate, stated as a percentage, assuming that the residual value of the fixed asset is to be ignored: (a) 2 years, (b) 8 years, (c) 10 years, (d) 20 years, (e) 25 years, (f) 40 years, (g) 50 years.

Equipment acquired on January 3, 2007, at a cost of \(265,500, has an estimated useful life of eight years and an estimated residual value of \)31,500. a. What was the annual amount of depreciation for the years 2007, 2008, and 2009, using the straight-line method of depreciation? b. What was the book value of the equipment on January 1, 2010? c. Assuming that the equipment was sold on January 4, 2010, for \(168,500, journalize the entry to record the sale. d. Assuming that the equipment had been sold on January 4, 2010, for \)180,000 instead of $168,500, journalize the entry to record the sale.

Isolution Company acquired patent rights on January 4, 2007, for \(750,000. The patent has a useful life equal to its legal life of 15 years. On January 7, 2010, Isolution successfully defended the patent in a lawsuit at a cost of \)90,000. a. Determine the patent amortization expense for the current year ended December 31, 2010. b. Journalize the adjusting entry to recognize the amortization.

On April 1, Gyminny Delivery Services acquired a new truck with a list price (fair market value) of \(150,000. Gyminny received a trade-in allowance of \)30,000 on an old truck of similar type and paid cash of \(120,000. The following information about the old truck is obtained from the account in the equipment ledger: cost, \)96,000; accumulated depreciation on December 31, the end of the preceding fiscal year, \(64,000; annual depreciation, \)16,000. Assuming the exchange has commercial substance, journalize the entries to record (a) the current depreciation of the old truck to the date of trade-in and (b) the transaction on April 1.
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