Question

On May 1, 2020, Spencer Industries purchased the machine for use in its production process. The cash price of this machine was $35,000, sales tax $2,200, insurance during shipping $80, shipping costs $150, installation and testing costs $70, and $100 of oil and lubricants to be used with the machinery during its first year of operations.

Instructions:

1. Prepare the journal entry to record its purchase on May 1, 2020.

2. Compute depreciation on December 31, 2020 under the methods bellow:

A. The straight-line method of depreciation, estimates the useful life of the machine is 4 years with a $5,000 residual value remaining at the end of that time period.

B. The declining-balance method, estimates the useful life of the machine is 4 years with a $5,000 residual value remaining at the end of that time period. The rate used is twice the straight-line rate.

C. The units-of-activity method, estimates that the useful life of the machine is 125,000 units. Actual usage is as follows: 2020, 28,000 units; 2021, 37,000 units; 2022, 42,000 units; and 2023, 18,000 units.

3. The adjusting entry to record annual depreciation using straight-line method on December 31, 2020.

Answer 1

1. The journal entry to record the purchase of machinery would be:

May 1, 2020 Dr. Machine A/C   37500

Cr. Cash A/C   37500

(To record the purchase of machine at the price of $35000 and taxes and charges paid in connection    with the purchese: sales tax $2,200, shipping insurance $80, shipping costs $150, installation and testing costs $70 Total $37500)

Note: Oil and lubricants to be used with the machine during its first year of operations is not a part of the installation cost and hence not included in the capitalized price of the machine.

2. Depreciation As on December 31, 2020

A) Depreciation as per Straight-line Method:

Machine cost 37500, residual value 5,000, and useful life = 4 years

Depreciation as per Straight-line Method = (Machine cost - residual value) / useful life = (37500 - 5,000) / 4

= 32500/4 = 8125

$8125 is the Depreciation for full one year and we have to provide for Depreciation from May 1, 2020 to Dec. 31, 2020 i.e. for 8 months. Hence 8125 * 8/12 = $5416.6666 or say, $5417

B) Depreciation as per Double declining Method:

Under straight-line Method, the rate of depreciation used is 25% (100%/ 4 years). Hence under the Double declining Method, the rate used will be double i.e.25*2 = 50%

Depreciation as per Double declining Method = (Machine cost - residual value) * 50% = (37500 - 5,000)

= 32500 * 50/100 = 16250

$16250 is the Depreciation for full one year and we have to provide for Depreciation from May 1, 2020 to Dec. 31, 2020 i.e. for 8 months. Hence 16250 * 8/12 = $10833.3333 or say, $10833

C) Depreciation as per units-of-activity method:

Under units-of-activity method, the depreciation will be calculated in the same proportion that its usage in the year bears to the total useful life of machine . Hence under the units-of-activity method, the calculation will be as below:

Total useful life of the machine is 125,000 units

Actual usage in 2020: 28,000 units

Hence the depreciation as per units-of-activity method will be:

= 32500 * 28000/125000 = $7280

Note: As this calculation is based upon actual use, it will not be converted to amount for 8 months.

D) The adjusting entry to record annual depreciation using straight-line method on December 31, 2020

December 31, 2020 Dr. Depreciation Expense A/C 5417

Cr. Accumulated Depreciation on Machine A/C 5417

(To record annual depreciation on machine using straight-line method from !st May to 31st Dec.)