Question

Subject: Accounting

On July 31, 2018 oxford Inc. purchased a machine by signing an 8-month $40,000 zero interest bearing promissory due March 31, 2019. The market rate of interest on similar notes is 6%. The machine will be depreciated using the double-declining method with a useful life of 10 years and salvage value of $ 3,000. Oxford has a 12/31 year-end.

1) prepare journal entry to record the purchase of the machine on July 31, 2018?

2a) In space provided blow, please prepare the necessary adjusting journal entry at December 31, 2018 related to the short term note?

2b) In space provided blow, please prepare the necessary adjusting journal entry at December 31, 2018 related to the machine?

3) prepare the journal entry when the note matures on March 31, 2019?

4a) Calculate the amount of depreciation Oxford would record on the machine during 2019 ( i.e., the second year the asset is being depreciate) ?

4b) What is the carrying value of the machine at December 31, 2019?

Answer 1

1) prepare journal entry to record the purchase of the machine on July 31, 2018?

Rate for 1 month = 0.50%

PV = 40000 * (1 / 1.005)^8 = 40000 * 0.96088 = 38435

Date	Accounts	Debit	Credit
July 31, 2018	Machinery	38435
	Short term note payable		38435

2a) In space provided blow, please prepare the necessary adjusting journal entry at December 31, 2018 related to the short term note?

For 5 month interest accrued = 38435 * 6% * 5 / 12 = 961

Date	Accounts	Debit	Credit
Dec 31, 2018	Interest expenses	961
	Interest payable		961

2b) In space provided blow, please prepare the necessary adjusting journal entry at December 31, 2018 related to the machine?

Related to machine depreciation are adjusted under double decline. And first year 5 month period depreciation are recorded

Purchase cost = 38435

Decline rate = ( 100 / 10 ) * 2 = 20%

First year full depreciation = 38435*20% = 7687

Under half year convention

For 6 month period = 7687 * 1 / 2= 3843.5

Date	Accounts	Debit	Credit
Dec 31, 2018	Depreciation expenses	3843.5
	Accumulated depreciation		3843.5

3) prepare the journal entry when the note matures on March 31, 2019?

Note payable = 38435

Interest payable = 40000-38435 = 1565

Date	Accounts	Debit	Credit
Mar 31, 2019	Short term note payable	38435
	Interest payable	961
	Interest expenses (1565-961)	604
	Cash		40000

4a) Calculate the amount of depreciation Oxford would record on the machine during 2019 ( i.e., the second year the asset is being depreciate) ?

Book value on Dec 31, 2018 = 38435 - 3843 = 34592

Depreciation in year 2 = 34592 * 20% = 6918

Date	Accounts	Debit	Credit
Dec 31, 2019	Depreciation expenses	6918
	Accumulated depreciation		6918

4b) What is the carrying value of the machine at December 31, 2019?

Book value on Dec 31, 2018 = 34592

Less: depreciation year 2 = 6918

Carrying value of the machine at December 31, 2019 = 34592 - 6918 = 27674