Question

Equipment1 was purchased at the beginning of the year 2016 for $50,000 cash. No salvage/residual value. Straight-line depreciation is used over a 10-year life.

Equipment2 was also purchased at the beginning of the year for 550,000 (no salvage) 10 year life. We decided to use SL method. The equipment2 required a $5,000 repair by year-end.

Equipment3 was purchased on 6/1 for 100,000 (20,000 salvage value)., 10 year life. We decided to use SYD as a depreciation method. At 12/31/2016 it required a capital improvements of $40,000 which we signed a note to pay in 9 months.

Prepare Journal entries for all transactions

Answer 1

Solution:

Journal

Date	Journal	Debit	Credit
1/1/2016	Equipment 1	$50,000
	To cash		$50,000
	(Being equipment 1 purchases for cash)
1/1/2016	Equipment 2	$550,000
	To cash		$550,000
	(Being equipment 2 purchases for cash)
6/1/2016	Equipment 3	$100,000
	To cash		$100,000
	(Being equipment 3 purchases for cash)
12/31/2016	Depreciation	$5000
	To Accumulated Depreciation-Equipment 1		$5000
	(Being depreciation provided for equipment 1 on straight line method)
12/31/2016	Depreciation	$55,000
	To Accumulated Depreciation-Equipment 2		$55,000
	(Being depreciation provided for equipment 2 on straight line method)
12/31/2016	Repairs	$5000
	To cash		$5000
	(Being repairs paid on equipment 2 )
12/31/2016	Equipment 3 - Capital improvements	$40,000
	To Notes Payable		$40,000
	(Being amount of capital improvement capitalized in equipment 3)
12/31/2016	Depreciation	$12,727
	To Accumulated depreciation- Equipment 3		$12,727
	(Being depreciation provided on equipment 3 using sum of years digit method)

Workings: Calculation of depreciation:

Equipment 1 = ($50,000/10) = $5,000

Equipment 2 = ($550,000/10) = $ 55,000

Equipment 3 = Sum of years = [n x (n+1) ] / 2 = (10 x 11)/2 = 55

= (years left/ sum of years) x (Original cost- residual value)

= (10/55) x ($100,000+40,000- 20,000) x (7 /12)

= $12,727