Question

Canada Canning Company owns processing equipment that had an initial cost of $106,000, expected useful life of eight years, and expected residual value of $10,000. Depreciation calculations are done to the nearest month using the straight-line method, and depreciation is recorded each December 31.

During the equipment's fifth year of service, the following expenditures were made:

Jan. 7	Lubricated and adjusted the equipment to maintain optimum performance, at a cost of $500.
Mar. 13	Replaced belts, hoses, and other parts that were showing signs of wear on the equipment, at a cost of $350.
June 28	Completed a $14,000 overhaul of the equipment. The work included the installation of new computer controls to replace the original controls, which had become technologically obsolete. As a result of this work, the equipment's estimated useful life was increased to 10 years and the estimated residual value was increased to $11,000.

Required:

a.  

Prepare journal entries to record each of the above transactions.

b.  

Calculate the depreciation expense that should be recorded for this equipment in the fourth year of its life, in the fifth year of its life (the year in which the above transactions took place), and in the sixth year of its life.

Answer 1

Journal Entries
date	explanation	debit	credit
7-Jan	repairs	500
	cash		500
13-Mar	repairs	350
	cash		350
28-Jun	equipment	14000
	cash		14000
Depreciation
cost of equipment		106000
less scrap value		10000
amount to be depreciated		96000
life of equipment		8 years
annual depreciation	96000/8	12000
Depreciation in Year		12000
Depreciation expense in year 5
Depreciation for first 6 months	12000*50%	6000
depreciation for last 6th month after overhaul	10000/2	5000
amount of annual depreciation in year 5		11000
Book value of equipment after 4.5 Years
Cost of equipment		106000
accumulated depreciation	12000*4.5	54000
Book value of equipment after 4.5 Years		52000
addition in equipment		14000
value of equipment after overhaul	52000+14000	66000
less scrap value		11000
amount to be depreciated		55000
remaining life of equipment		5.5 years
Annual depreciation after overhaul	55000/5.5	10000
amount of depreciation for half a year	10000/2	5000
amount of annual depreciation In year 6th	10000