Question

On January 1, 20X6, Outback Air purchased a new engine for one of its airplanes used to transport adventurers to remote regions of western Australia. The engine cost $750,000 and has a service life of 10,000 flight hours. Regulations require careful records of usage, and the engines must be replaced or rebuilt at the end of the 10,000 hour service period. Outback simply chooses to sell its used engines and acquire new ones. Used engines are expected to be resold for 1/3 of their original cost. Outback uses the units-of-output depreciation method.

Please complete the account analysis, necessary journal entry, T accounts and Balance sheet presentation for year 3, X8.

(a) Assuming that the engine was used as follows, prepare a schedule showing annual depreciation expense, accumulated depreciation, and related calculations for each year.

20X6 1,500 hours

20X7 4,000 hours

20X8 3,000 hours

20X9 1,500 hours

(b) Show how the asset and related accumulated depreciation would appear on a balance sheet at December 31, 20X7.

(c) Prepare journal entries to record the asset's acquisition, annual depreciation for each year, and the asset's eventual sale for $250,000

Answer 1

ANSWER:

Answer a

Year

Hours worked

Per hour depreciation

Depreication expenses

Accumulate depreciation

2006

1500

50

75000

75000

2007

4000

50

200000

275000

2008

3000

50

150000

425000

2009

1500

50

75000

500000

Cost of the asset

750000

Service life in flight hours

10000

Sales value (1/3 of cost)

250000

Per flight hour depreciation (cost - sales value)/ life in flight hours

50

Answer b – balance sheet December 2007

Fixed assets:-

Engin 750000

(-)Accumulated depreciation -275000

Net fixed assets 475000

Answer c

Asset acquisition:-

Flight engine a/c Dr. 750000

To Bank a/c 750000

Yearly depreciation:-

Depreciation a/c Dr. 75000/200000/150000/75000

To Provision for depreciation a/c 75000/200000/150000/75000

Sale of engine :-

Provision for depreciation a/c Dr. 500000

To Flight engine a/c 500000

Bank a/c Dr. 250000

To Flight engine a/c 250000

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