In: Accounting
On April 1, 2016, the KB Toy Company purchased equipment to be used in its manufacturing process. The equipment cost $57,200, has an ten-year useful life, and has no residual value. The company uses the straight-line depreciation method for all manufacturing equipment. On January 4, 2018, $14,750 was spent to repair the equipment and to add a feature that increased its operating efficiency. Of the total expenditure, $2,900 represented ordinary repairs and annual maintenance and $11,850 represented the cost of the new feature. In addition to increasing operating efficiency, the total useful life of the equipment was extended to 12 years.
1. Prepare journal entries for the depreciation
for 2016 and 2017.
2. Prepare journal entries for the 2018
expenditure.
3. Prepare journal entries for the depreciation
for 2018.
Annual Dep =(57200-0)/10)= 5720
Dep for 2016 =5720*(275/365)=4310 (Asset used for 275 days in 2016)
Dep for 2017=5720 (Asset used for full 12 months in 2017)
1.JOURNAL ENTRIES FOR DEPRECIATION IN 2016 AND 2017
DEC 31,2016 Depreciation Exp A/c(Dr) 4310
To Accumulated Depreciation A/c(Cr) 4310
Dec 31,2017 Depreciation Exp A/c(Dr) 5720
To Accumulated Depreciation A/c(Cr) 5720
2. JOURNAL ENTRIES FOR 2018 EXPENDITURE
Jan 4,2018 Revenue Expense A/c (Dr) 2900 ( Revenue exp)
To Bank A/c (Cr) 2900
Jan 4,2018 Plant Property & Equipment A/c(Dr) 11850 (Capital Exp)
To Bank A/c(Cr) 11850
Calculation of Depreciation in 2018
Depreciation for 4 days(from Jan 1-Jan 4,2018)=5720*(4/365)=63 (Rounded to nearest whole no)
Capitalize the expenditure of 11850 as it is increasing the operating efficiency and also increasing the life to 12 years
Carrying Value of asset at the end of 2018=57200-4310-5720-63+11850=58957
Total Life of improved equipment= 12 years ie 12*365=4380 days
Days asset is used=1 year 9 months and 4 days ie (275+365+4)=644 Days
So Remaining life of asset as on Jan 4,2018 =4380-644=3736 Days ie (3736/365) =10.2356 Years Approx
New Annual Annual Depreciation= 58957/10.2356= 5760
Depreciation for 2018 on the improved asset = 5760*(365-4/365)=5697 (Because improved asset used for 361 days)
Therefore,total dep exp in 2018= 63+5697=5760 (Dep on original asset + dep on improved asset)
JOURNAL FOR DEPRECIATION FOR 2018
JAN 4,2018 Depreciation Exp A/c (Dr) 63
To Accumulated Depreciation A/c(Cr) 63
DEC 31,2018 Depreciation Exp A/c (Dr) 5697
To Accumulated Depreciation A/c (Cr) 5697