Question

On May 1, 2019, Blanton’s Corp. purchased equipment.

1. The equipment had a list price of $220,000. Because it was a favored customer of the dealer, the dealer discounted the price to Blanton’s by $5%. The dealer also offered to finance 90% of the total after-discount price plus the sales tax at the rate of 6.0% for 18 months at a rate of 2.4% per year. No payments are due on the note until it matures. Blanton’s accepted those terms, signed the corresponding note payable, and delivered cash for the amount not financed.
2. In addition to the amounts noted above, Blanton’s paid in cash shipping charges of $1,240, installation charges of $1,100, and $2,350 to repair damage to the equipment that occurred between the time it was delivered and the time it was installed.
3. Once the equipment was operational, Blanton’s spent $2,150 for print and radio advertising to raise awareness of the advanced capabilities the new equipment allowed it to provide its customers.
4. 1. Prepare the journal entry for each of items a. through c.
   2. What is Blanton’s cost of the equipment for financial reporting purposes?
   3. Assume the answer to ii. is $225,000. How much depreciation expense will Blanton’s record in 2019 and 2020 if it uses straight-line method, the half-year convention and a useful life of 10 years? How much depreciation expense will Blanton’s record in 2019 and 2020 if it uses the double declining balance method, the half-year convention and a useful life of 10 years?
   4. What year-end 2019 adjusting entry is required for the note payable assuming that Blanton’s accrues interest only at year end?
   5. Is the note payable a current liability or long-term liability at December 31, 2019? Explain your answer.

Answer 1

Answer I:

Books of Blanton’s Corp.

DATE	PARTICULARS	Dr.	Cr.
May 1, 2019	Equipment A/c        Dr.	209,000
	Sales Tax A/c Dr.	12,540
	To Dealer A/c		221,540
	(Being Equipment purchased)
May 1,2019	Dealer A/c Dr.	221,540
	To Bank A/c		22,154
	To Bills Payable A/c		199,540
	(Being Payment Settled by accepting Bill for 18 months and balance being paid through Bank.)
May 1, 2019	Shipping Expenses A/c                                            Dr.	1,240
	Installation Expenses A/c                                           Dr.	1,100
	Repair Expenses A/c                                               Dr.	2,350
	To Bank A/c		4,690
	(Being Direct expenses paid for Equipment)
May 1, 2019	Equipment A/c                                                             Dr.	4,690
	To Shipping Expenses A/c		1,240
	To Installation Expenses A/c		1,100
	To Repair Expenses A/c		2,350
	(Being direct expenses related to equipment being capitalized)
May 1, 2019	Advertisement Expenses A/c                                    Dr.	2,150
	To Bank A/c		2,150
	(Being Advertisement Expenses paid.)

Answer II:

Statement Showing Computation of the Cost of Equipment for Financial Reporting:

Particulars	Amount ($)
List price of Equipment	220,000
Less: Discount 5%	(11,000)
Add: Shipping Charges	1,240
Add: Installation Charges	1,100
Add: Repair Charges	2,350
Cost of Equipment	213,690

Answer III:

Calculation of Straight-line Depreciation:

Depreciation= [{Cost of Equipment (-) Salvage Value}/ Life of Asset] X Months Equipment put to use/ 12

Depreciation for 2019 = [{$225,000 (-) 0/ 10}] X 8/12

                                         = $15,000

Depreciation for 2020 = [{$225,000 (-) 0/ 10}]

                                         = $22,500

Calculation of Double Decline Depreciation:

Depreciation = 2 X Straight Line Depreciation Rate X Value of Asset at the beginning of the year

Depreciation for 2019= 2 X 10% X $225,000 X 8/12 = $30,000

Depreciation for 2020= 2 X 10% X $195,000 = $39,000

Answer IV: No adjustment entry is required for interest on bill payable at the end of the year 2019, as no interest is due as on December 31,2019 on the bill.

Answer V: On December 31, 2019 Bill Payable should be treated as current Liability, as it has the maturity period of less than 12 months as on December 31, 2019.