Question

On January 2, 2018, Athol Company bought a machine for use in operations. The machine has an estimated useful life of eight years and an estimated residual value of $1,750. The company provided the following information:

1. Invoice price of the machine, $73,000.
2. Freight paid by the vendor per sales agreement, $870.
3. Installation costs, $2,000 cash.
4. Cost of cleaning up the supplies, boxes, and other garbage that remained after the installation of the machine, $125 cash.
5. Payment of the machine's price was made as follows:

January 2:

• Issued 950 common shares of Athol Company at $4 per share.
• Signed a $39,000 note payable due April 16, 2018, plus 12 percent interest.
• Balance of the invoice price to be paid in cash. The invoice allows for a 2 percent cash discount if the cash payment is made by January 11.

January 15: Paid the balance of the invoice price in cash.

April 16: Paid the note payable and interest in cash.

6. On June 30, 2020, the company completed the replacement of a major part of the machine that cost $12,550. This expenditure is expected to reduce the machine’s operating costs, increase its estimated useful life by two years, and decrease its estimated residual value to $1,250.
7. Assume that on October 1, 2025, the company decided to replace the machine with a newer, more efficient model. It then sold the machine to Sako Ltd. on that date for $23,000 cash.

Required:

1. Compute the acquisition cost of the machine.

2. Prepare the journal entries to record the purchase of the machine and subsequent cash payments on January 15 and April 16, 2018. (Do not round intermediate calculations and round your final answers to the nearest dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

3. Compute the depreciation expense for each of the years 2018, 2019, and 2020, assuming the company’s fiscal year ends on December 31. Use the straight-line depreciation method. (Do not round intermediate calculations and round your final answers to the nearest dollar amount.)

4. Prepare the journal entry to record the sale of the machine on October 1, 2025. (Hint: First determine the balance of the accumulated depreciation account on that date.) (Do not round intermediate calculations and round your final answers to the nearest dollar amount. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Q1	Cost of Machine
	Invoice Price		73000
	Installation Cost	2000
	Cost of Cleaning up	125
				2125
	Cost of the machine		75125
Q2	Entries for Purchase of Machinery
Date
02-01-2018	Machinery A/c Dr	75125
	To Vendor A/c		73000
	To Cash A/c		2125
	(Being Machinery Purchased and the installation and cleaning costs paid in cash)
02-01-2018	Vendor A/c Dr	3800
	To Common Shares		3800
	(Being Common shares of the Company issued to the vendor as part payment)
02-01-2018	Vendor A/c Dr	39000
	To Note Payable		39000
	(Being Note payable on 16th of April issued to vendor carrying 12% Interest)
15-01-2018	Vendor A/c Dr	30200
	To Cash			30200
	(Being the balance amount payable to vendor paid in cash)
16-04-2018	Note Payable A/c Dr	39000
	Interest A/c Dr	1333
	To Bank			39000
	To Cash			1333
	(Being Note Payable Paid to vendor and the interest paid in cash)
Q3	Depreciation Expense in each year
02-01-2018	Cost of Machinery		75125
	Residual Value		1750
	Depreciable Value		76875
	Useful Life			8 Years
Depreciation for 2018
	Depreciation		9583
	(Depreciable Value*No of days of Usage/useful life)
	(76875*364/(365*8)
Depreciation for 2019
	Dereciation		9609
	(76875*365/(365*8)
Depreciation for 2020			4805
	upto 30th of June for 6 Months
	(76875/8*6/12)
30-06-2020	WDV as on upgradation		52878
	Cost of Upgradation		12550
	Cost after upgradation		65428
	Change in residual value		500
	(residual value decrease from 1750 to 1250)
	New depreciable value		65928
	Increase in Estimated useful life	2 Years
	Balance life as on this date	7.5 years
	(original Life-lapsed life till date+extra life on upgrading)
	(8-2.5+2)
	Depreciation from July to Dec	4395
Q4	Journal Entry for Sale of Machinery
	Date of Sale				01-10-2025
	Sale Value					23000
	Accumulated Depreciation
	Accumulated Depreciation till 30/06/2020 as above	23997
	Accumulated Depreciation from 01/07/2020 tp 01/10/2025
	No of Months of usage from 01 July 2020 to Sep 30 2025	63
	Total Life					90
	Depreciable value				65928
	Depreciation from 01/07/20 to 01/10/25		46150
	WDV as on 01/10/25				19778
	Profit on sale				3222
25-10-2025	Accumulated Depreciation A/c Dr		70147
	Bank A/c Dr			23000
	Profit on sale of Machinery			3222
	Machinery A/c				89925
	(Being asset sold and profit on sale accounted for)