O’Connor Company ordered a machine on January 1 at a purchase price of $40,000. On the date ofdelivery, January 2, the company paid $10,000 on the machine and signed a Iong-term note payablefor the balance. On January 3, it paid $350 for freight on the machine. On January 5, O’Connor paidcash for installation costs relating to the machine amounting to $2,400. On December 31 (the endof the accounting period), O’Connor recorded depreciation on the machine using the straight-linemethod with an estimated useful life of 10 years and an estimated residual value of $4,750.Required:1. Indicate the effects (accounts, amounts, and 1 or 2 ) of each transaction (on January 1, 2, 3,and 5) on the accounting equation. Use the following schedule:Date Assets 5 Liabilities 1 Stockholders’ Equity2. Compute the acquisition cost of the machine.3. Compute the depreciation expense to be reported for the first year.4. What should be the book value of the machine at the end of the second year?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
O’Connor Company ordered a machine on January 1 at a purchase price of $40,000. On the date of
delivery, January 2, the company paid $10,000 on the machine and signed a Iong-term note payable
for the balance. On January 3, it paid $350 for freight on the machine. On January 5, O’Connor paid
cash for installation costs relating to the machine amounting to $2,400. On December 31 (the end
of the accounting period), O’Connor recorded
method with an estimated useful life of 10 years and an estimated residual value of $4,750.
Required:
1. Indicate the effects (accounts, amounts, and 1 or 2 ) of each transaction (on January 1, 2, 3,
and 5) on the
Date Assets 5 Liabilities 1 Stockholders’ Equity
2. Compute the acquisition cost of the machine.
3. Compute the depreciation expense to be reported for the first year.
4. What should be the book value of the machine at the end of the second year?
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