Question

Fabricate Ltd purchased machinery on 2 January 2019, at a cost of $800 000 by taking out a bank loan for the full amount. The machinery is depreciated using the straight-line method over a useful life of 8 years with a residual value of $80 000.

On 3 January 2022, an overhaul of the machinery was made at a cost of $112 000 on account. Because of this overhaul, the useful life was re-estimated at 4 years from 3 January 2022, and the residual value was amended to $40 000. The carrying amount of parts replaced was considered to be $10 000.

Required

(a) Assuming the financial year ends on 31 December, prepare journal entries to record:

i. the purchase of the machinery on 2 January 2019  
ii. depreciation expense for 2019, 2020 and 2021

iii. the overhaul expenditure on 3 January 2022

iv. depreciation expense for 2022.   

Answer 1

Requirement (a) i:

Date	Account title and explanation	Debit	Credit
1/2/2019	Machinery	$800,000
	Notes payable		$800,000
	[To record purchase of machinery ]

Requirement (a) ii:

Date	Account title and explanation	Debit	Credit
12/31/2019	Depreciation expense	$72,000
	Accumulated depreciation-equipment		$72,000
	[To record depreciation expense]
12/31/2020	Depreciation expense	$72,000
	Accumulated depreciation-equipment		$72,000
	[To record depreciation expense]
12/31/2021	Depreciation expense	$72,000
	Accumulated depreciation-equipment		$72,000
	[To record depreciation expense]

Calculations:

Depreciation expense = (cost-residual value)/10 years = ($80,000-$80,000)/10 = $72,000

Requirement (a) iii:

Date	Account title and explanation	Debit	Credit
1/3/2022	Machinery	$112,000
	Accounts payable		$112,000
	[To record overhaul of the machinery on account]

Requirement (a) iv:

Date	Account title and explanation	Debit	Credit
12/31/2022	Depreciation expense	$165,500
	Accumulated depreciation-equipment		$165,500
	[To record depreciation expense]

Calculations:

Cost	$800,000
Accumulated depreciation for 3 years [72000 x 3]	($210,000)
Book value at Dec 31,2021	$590,000
Add: Overhaul	$112,000
(Less): New residual value	($40,000)
Depreciable value for 2022	$662,000
÷ Remaining useful life	4 years
Depreciation expense for 2022	$165,500