Question

You are engaged in the audit of the financial statements of Holman Corporation for the year ended December 31, 20X6. The accompanying analyses of the Property, Plant, and Equipment and related accumulated depreciation accounts have been prepared by the chief accountant of the client. You have traced the beginning balances to your prior year’s audit working papers.

HOLMAN CORPORATION
Analysis of Property, Plant, and Equipment
and Related Accumulated Depreciation Accounts
Year Ended December 31, 20X6
	Final		Assets				Per Ledger
Description	12/31/X5		Additions		Retirements		12/31/X6
Land	$	443,500	$	6,400			$	449,900
Buildings		134,000		24,500				158,500
Machinery and equipment		399,000		43,200	$	31,500		410,700
	$	976,500	$	74,100	$	31,500	$	1,019,100

	Final		Accumulated Depreciation				Per Ledger
Description	12/31/X5		Additions*		Retirements		12/31/X6
Buildings	$	67,000	$	5,850			$	72,850
Machinery and equipment		179,550		41,935				221,485
	$	246,550	$	47,785			$	294,335

*Depreciation expense for the year.

All plant assets are depreciated on the straight-line basis (no residual value taken into consideration) based on the following estimated service lives: building, 25 years; and all other items, 10 years. The company’s policy is to take one half-year’s depreciation on all asset additions and disposals during the year.

Your audit revealed the following information:

1.	On April 1, the company entered into a 10-year lease contract for a die casting machine, with annual rentals of $6,400 payable in advance every April 1. The lease is cancelable by either party (60 days' written notice is required), and there is no option to renew the lease or buy the equipment at the end of the lease. The estimated service life of the machine is 10 years with no residual value. The company recorded the die casting machine in the Machinery and Equipment account at $43,200, the present value at the date of the lease, and $2,160 applicable to the machine has been included in depreciation expense for the year.
2.	The company completed the construction of a wing on the plant building on June 30. The service life of the building was not extended by this addition. The lowest construction bid received was $23,100, the amount recorded in the Buildings account. Company personnel constructed the addition at a cost of $20,200 (materials, $8,900; labor, $6,900; and overhead, $4,400).
3.	On August 18, $6,400 was paid for paving and fencing a portion of land owned by the company and used as a parking lot for employees. The expenditure was charged to the Land account.
4.	The amount shown in the machinery and equipment asset retirement column represents cash received on September 5 upon disposal of a machine purchased in July 20X2 for $58,000. The chief accountant recorded depreciation expense of $4,300 on this machine in 20X6.
5.	Harbor City donated land and a building appraised at $240,000 and $540,000, respectively, to Holman Corporation for a plant. On September 1, the company began operating the plant. Since no costs were involved, the chief accountant made no entry for the above transaction.

Required:

Prepare the adjusting journal entries that you would propose at December 31, 20X6, to adjust the accounts for the above transactions. Disregard income tax implications. The accounts have not been closed. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round any division. Round your answers to the nearest dollar amount.)

Journal entry worksheet

Record the entry to correct the April 1, 20X6 entry for the lease of a die casting machine under a ten-year, cancelable lease having no renewal or purchase option.

Note: Enter debits before credits.

	Transaction General Journal Debit Credit 1 ???????? ????? ???????? ????? ? ? ? Depreciation expense??? 2,160?? Machinery and equipment??? 43,200??

Answer 1

General journal	Debit	Credit
Prepaid Rent (6400*3/12)	$      1,600
Accumulated Depreciation: Mach. & Equip	$      2,160
Contract Payable	$   36,800
Rent Expense	$      4,800
Machinery and Equipment		$   43,200
Depreciation Expense		$      2,160
Gain on Construction of Building (23100-20200)	$      2,900
Depreciation Expense	$         380
Accumulated Depreciation: Buildings		$         380
Buildings		$      2,900
Land Improvements	$      6,400
Depreciation Expense	$         320
Accumulated Depreciation: Land Imp.		$         320
Land		$      6,400
Accumulated Depreciation: Mach. and Equip	$   24,600
Loss on Sale of Mach. and Equip	$      3,300
Machinery and Equipment		$   26,500
Depreciation Expense		$      1,400
Land	$ 240,000
Buildings	$ 540,000
Depreciation	$   10,800
Paid-in Capital from Donated Assets		$ 780,000
Accumulated Depreciation: Buildings		$   10,800

Working

Working
entry 2
correct depreciation	20200*1/2*1/12	$       842
Per client calculated on 25 yrs	23100/25*1/2	$       462
Difference		$       380
entry 3
correct depreciation	6400/10*1/12	$       320
entry 4
costs		$ 58,000
through 20X5	58000/10*3.5	$ 20,300
For 20X6	58000/10*0.5	$   2,900
undepreciated costs		$ 34,800
proceeds of sale		$ 31,500
loss on sale		$   3,300
Accumulated dep
through 20X5	$              20,300
20x6	$                 4,300
recorded	$              24,600
should have been
through 20X5	$              20,300
For 20X6	$                 2,900
total	$              23,200
Difference	$                 1,400
entry 5
correct depreciation	540000/25*1/2	$ 10,800