Question

Question 2: prepare the journal entries for the following cases:

1- The cost of equipment SR75,000 – accumulated depreciation SR75,000

The company disposes the equipment (no salvage value).

2- The cost of equipment SR80,000 – accumulated depreciation SR60,000

The company disposes the equipment (no salvage value).

3- The cost of equipment SR85,000 – accumulated depreciation SR70,000

The company sold the equipment for 12,000.

4- The cost of equipment SR95,000 – accumulated depreciation SR70,000

The company sold the equipment for 30,000.

5- Delta Inc. trades (exchange) it’s used (old) machine for a new model with Alpha Co.

The used machine has a book value of SR8,000 (original cost SR12,000 less SR4,000 accumulated depreciation) and a fair value of SR5,000.

Delta will pay SR9000.

The exchange has commercial substance.

6- Delta Inc. trades its used (old) machine for a new model at Alpha Inc.

The exchange has commercial substance.

The used machine has a book value of $6,000 (original cost $11,000 less $5,000 accumulated depreciation) and a fair value of $8,000.

Delta will pay $8000 cash.

Computes the cost of the new machine for Delta Company, and record the exchange transaction in Delta Journal book?

The cost of new machine = fair value of old machine + cash paid= 8000 + 8000 = 18000

There is a gain = fair value - book value = 8000 – 6000 = 2000

7- Compute: 1-Current Cash Debt Coverage Ratio and 2-Cash Debt Coverage Ratio using the following data:

Net Cash Provided by Operating Activities $70,000

Average Current Liabilities $50,000

Average Total Liabilities $100,000

8- Compute free cash flow using the following data:

Net operating cash flow 90,000 – capital expenditure 20,000 – dividends 15,000

Answer 1

a)The following are journal entries for every case

Case	Accounts Title	Debit(SR)	Credit(SR)
1.	Accumlated Depreciation	75,000
	Equipment		75,000
	(Recording of disposal of fully depreciated equipment with no salvage value)
2.	Accumulated Depreciation	60,000
	Loss on Disposal	20,000
	Equipment		80,000
	(Recording of disposal of equipment with no salavage)
3	Accumulated Depreciation	70,000
	Cash	12,000
	Loss on Sale(85000-70000-12000)	3000
	Equipment		85,000
	(Recording of equipment sold at a loss of 3000)
4	Accumulated Depreciation	70,000
	Cash	30,000
	Profit on sale(95000-70000-30000)		5000
	Equipment		95,000
	Recording of equipment sold at a loss of 5000)
5	Accumulated Depreciation(old)	4000
	Equipment(New)	9000
	Gain		1000
	Equipment(old)		12000
	(Being old equipment exchanged for new one)
6	Accumulated Depreciation(old)	5,000
	Equipment(New)	8,000
	Gain		2000
	Equipment(old)		11,000
	Beinf old equipment exchanged for new one)

7)Calculation of Ratios

Given,

Net Cash Provided by Operating Activities $70,000

Average Current Liabilities $50,000

Average Total Liabilities $100,000

1)-Current Cash Debt Coverage Ratio = [Net Cash Provided by Operating Activities/Average Current Liabilities]

=(70,000 / 50000)= 1.4

2)Cash Debt Coverage Ratio = [Net Cash Provided by Operating Activities/Average Total Liabilities]

=(70,000 / 100,0000)= 0.7

8- Compute free cash flow using the following data:

Net operating cash flow 90,000 – capital expenditure 20,000 – dividends 15,000

Free cash flow is the cash left over in the business after the company pays its opearting expenses and capital expenditure.

Free cash Flow= ( Net operating cash flow - Capital expenditure) =(90,000- 20,000)= 70,000

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