Question

Journal entry of

December 12, 2019, Craig Purchases one Automobile with Selling Price $ 14,000 and Extended Warranty $ 1,000. HST $1,950. Cash deposit $ 3000.00 and the balance ($13,950) is to be paid on a bank loan 6% per annum simple interest.

Provide Journal Entries for the purchase, extended warranty, depreciation (5 years, straight line, no salvage value) and accrued interest. Show calculations, please.

Answer 1

Working Notes:-

A.) Before going for Journal Entries, to familiar with folllowing terminology :-

1. Capitalisation :-

When an asset is purchased the costs which are capitalized include both the cost of the asset itself and the costs incurred in bringing the asset to the location and working condition ready for its intended use, such as shipping, installation and testing costs.

2. Extended Fixed Assets Warranty :-

An extended warranty is one which is is sold separately to the product itself. In your example, it is assumed that for an additional fee of $ 1,000 the supplier was sold an extended warranty to cover the product for a further Five years.

B.) As per GAAP, HST paid can be capitalised and depreciated over the useful life.

C.) Extended Warranty Deffered Schedule

Extended Warranty deffered schedule
Year	Book Value Year Start	Deferred Expense	Already recognised	Book Value Year end
2019	1,000	11	11	989
2020	989	200	211	789
2021	789	200	411	589
2022	589	200	611	389
2023	389	200	811	189
2024	189	189	1,000	0

D.) Depreciation Schedule :-

Depreciation schedule
Year	Book Value Year Start	Deprciation expenses	Accumulated Depreciation	Book Value Year end
2019	15,950	172	172	15,778
2020	15,778	3,190	3,362	12,588
2021	12,588	3,190	6,552	9,398
2022	9,398	3,190	9,742	6,208
2023	6,208	3,190	12,932	3,018
2024	3,018	3,018	15,950	0