We have covered various methods of depreciation. Here we are sharing question answer for Straight Line method.
JK Co. bought a heavy duty machinery for its production process on July 1, 2008 at a price of $ 200,000 with credit terms of 2/10, n/30. In order to purchase this machinery, JK has to incur the following additional expenses on the same date:
| Sales tax | 15 % |
| Freight charges | 25,000 |
| Transportation from railway to the JK Factory | 3,000 |
| Installation charges | 8,000 |
It is the company policy to depreciate the machinery over the 10 years. This machine has a scrape value of $ 10,000. Straight line method of depreciation is to be used for charging the depreciation. JK closes its accounting year on December 31 each year.
Required
- Calculate the cost of the machine and record the journal entry for acquisition of the machine.
- Calculate the annual depreciation expenses.
- Calculate the depreciation expense and accumulated depreciation for December 31, 2008, 2009 & 2010.
- Record the adjusting entries for depreciation expenses for the year ended December 31, 2008, 2009 & 2010.
- Prepare the partial balance sheet as at December 31, 2008, 2009 & 2010.
Solution
Cost of Machine
| List price of the machine | 200,000 | |
| Less: cash discount (200,000 x 2 %) | (4,000) | |
| Cash price of machinery | 196,000 | |
| Add: other expenses related to machinery acquisition | ||
| Sales tax 196,000 x 15 % | 29,400 | |
| Freight charges | 25,000 | |
| Transportation | 3,000 | |
| Installation charges | 8,000 | 65,400 |
| Total cost of the machine | 261,400 |
JK Co.
General Journal Entries
| Date | Particulars | Debit | Credit |
| 01 July 2008 | MachineCash(recording of purchase of machinery) | 196,000 | 196,000 |
| Sales taxFreight chargesTransportationInstallation chargesCash(Recording of initial expenses for bringing the machinery into the factory and its intended use.) | 29,40025,0003,0008,000 | 65,400 | |
| MachineSales taxFreight chargesTransportationInstallation charges(transferring the initial expenses to the machine account) | 65,400 | 29,40025,0003,0008,000 |
Annual depreciation Using Straight Line
Annual depreciation expense = (cost – residual value) / Estimated life = (261,400 – 10,000) / 10 = $25,140 per annum
Depreciation expense & Accumulated Depreciation
| Depreciation expense | Accumulated Depreciation | ||
| For Dec 31, 2008 | = 25,140 x 6/12 | 12,570 | 12,570 |
| For Dec 31, 2009 | 25,140 | 37,710 | |
| For Dec 31, 2010 | 25,140 | 62.850 |
JK Co.
Journal Entries – Depreciation
| Date | Particulars | Debit | Credit |
| Dec 31, 2008 | Depreciation expenseAllowance for depreciation(recording of depreciation expense for the year 2008) | 12,570 | 12,570 |
| Dec 31, 2009 | Depreciation expenseAllowance for depreciation(recording of depreciation expense for the year 2008) | 25,140 | 25,140 |
| Dec 31, 2010 | Depreciation expenseAllowance for depreciation(recording of depreciation expense for the year 2008) | 25,140 | 25,140 |
JK Co.
Balance Sheet Partial
As on December 31,
| 2008 | 2009 | 2010 | |
| Machine total cost | 261,400 | 261,400 | 261,400 |
| Less: accumulated depreciation | (12,570) | (37,710) | (62,850) |
| Book value of machine | 248,830 | 223,690 | 198,550 |