Question

Mason Ltd. purchased, for cash, equipment with an invoice price of $90,000. Other costs incurred were freight costs, $1,400; insurance while the equipment was in transit, $1,200; material and labour costs in testing equipment, $2,000; oil lubricants and supplies to be used while operating the equipment, $850; annual fire insurance policy covering equipment after it was put in use, $900; import duties $400. The equipment is estimated to have an $8,000 residual value at the end of its 10-year useful service life.

REQUIRED:

1. Calculate the cost of the equipment.
2. Record the purchase of the equipment.
3. Prepare the journal entry for the annual depreciation, assuming the straight-line method of depreciation is used.

Answer 1

Solution a:

Mason Ltd.
Computation of Cost of the equipment
Invoice Price	$90,000
Freight	$1,400
Insurance while the equipment was in transit	$1,200
Material and labor costs in testing equipment	$2,000
Import duties	$400
Total Cost of Equipment	$95,000

Solution b:

Account Title	Debit	Credit
Equipment Dr	$95,000
To Cash		$95,000

Solution c:

Annual straight line depreciation = ($95000 - $8000) / 10 = $8,700

Account Title	Debit	Credit
Depreciation expense Dr	$8,700
To Accumulated Depreciation - Equipment		$8,700