Question

Bay Inc. purchased some new equipment on January 1, 2019, with a list price of $50,000. The supplier agreed to accept a deposit of $20,000 on the date of purchase and a promissory note requiring payment of $10,000 on each December 31 for the next three years (December 31, 2019, to December 31, 2021). Bay is pleased that no interest is charged on the note since its bank would have charged 7% interest.

The equipment arrived on January 5, 2019, with a separate invoice of $2,000 for freight and transporting the equipment. The machine had several test runs in March and April 2019 at a total cost of $4,000, and it became operational on May 1, 2019. It is expected to last eight years from the date depreciation starts, and it has a residual value of $6,000.

Required

a. Prepare all journal entries that Bay should record relating to the items described above for the year ended December 31, 2019. Wayfair uses the double-declining-balance method of depreciation for all of its property, plant and equipment. Show your calculations.

b. Wayfair also has a separate division that specializes in the sale of small appliances. At the 2019 fiscal year end, Wayfair had three key inventory items which may require a writedown. The cost and estimated net realizable values (NRVs) of the items are as follows:

Per Unit

  Quantity Cost NRV

Juicer.       3,000   $25 $30

Bread Toaster 3,500 $30 $28

Oven 1,900 $24 $20

Calculate the amount (if any) that inventory should be written down by if the lower of cost and NRV is applied on an item-by-item basis. Provide the journal entry (if any) to record the writedown on inventory. Bay uses the inventory allowance method.

Answer 1

a.

Date	General Journal	Debit	Credit
		$	$
Jan 1, 2019	Equipment ( 20,000 + 10,000 x 2.6243 )	46,243
	Discount on Notes Payable	3,757
	Cash		20,000
	Notes Payable		30,000
Jan 5, 2019	Equipment	2,000
	Cash		2,000
Apr 2019	Equipment	4,000
	Cash		4,000
Dec 31, 2019	Depreciation Expense ( 52,243 x 25 % x 8/12)	8,707
	Accumulated Depreciation: Equipment		8,707
Dec 31, 2019	Interest Expense ( 30,000 - 3,757 ) * 7 %	1,837.01
	Discount on Notes Payable		1,837.01

PVA _{7%, n = 3} = [ { 1 - ( 1 / 1.07 ) ³ } / 0.07 ] = 2.6243

Present value of the annuities of $ 10,000 = $ 10,000 x 2.6243 = $ 26,243

Present value of the cash outflows = $ 20,000 + $ 26,243 = $ 46,243.

b.

Item	Quantity	Unit Cost	Total	Per Unit NRV	Total	Lower of Cost or NRV
Juicer	3,000	$ 25	$ 75,000	$ 30	$ 90,000	$ 75,000
Bread Toaster	3,500	30	105,000	28	98,000	98,000
Oven	1,900	24	45,600	20	38,000	38,000
			$ 225,600			$ 211,000

Date	General Journal	Debit	Credit
		$	$
Dec 31, 2019	Loss due to Decline to NRV	14,600
	Inventory Allowance		14,600