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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Wilcox Company acquires four machines that have the following characteristics:

Chapter 11, Problem 8E, Wilcox Company acquires four machines that have the following characteristics: Required: 1. Prepare

Required:

  1. 1. Prepare journal entries to record the acquisition and the first year’s depreciation expense, assuming that the composite method is used on a straight-line basis. Round the depreciation rate to 3 decimal places.
  2. 2. If the company sells Machine B after 4 years for $10,000, prepare the journal entry. Round all amounts to the nearest dollar.
  3. 3. Next Level What arguments may be used to support the composite depreciation method?

1.

To determine

Prepare journal entries for the given transaction.

Explanation

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

Prepare journal entries to record the purchase of machine and its depreciation expense under straight line method:

DateAccount Title & ExplanationDebit ($)Credit($)
Machine (1)    103,000
    Cash 103,000
(To record the purchase of machinery)

Table (1)

  • A machine is an asset and it increases the value of assets by $103,000. Therefore, debit the machine account with $103,000.
  • Cash is an asset, and it decreases the value of assets by $103,000. Therefore, credit cash account with $103,000.
DateAccount Title & ExplanationDebit ($)Credit($)
 Depreciation expense (3)15,000 
     Accumulated depreciation-Machine15,000
 (To record the depreciation expense)

Table (2)

  • Depreciation expense is a component of stockholder’s equity. It decreases the value of stockholder’s equity by $15,000. Therefore, debit depreciation expense account with $15,000.
  • Accumulated depreciation is a contra asset, and it decreases the value of asset by $15,000. Therefore, credit accumulated depreciation account with $15,000.

Working note (1):

Calculate the total annual depreciation...

2.

To determine

Prepare journal entries for the given transaction.

3.

To determine

State the arguments that are used to support composite depreciation method.

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