Chapter 8, Problem 4PSB

To determine

Journal Entries:

Journal entries are the entries that are made in the books of accounts to record every transaction that happens in the business in the chronological order.

Accounting rules for journal entries:

• To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
• To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

To Prepare: Journal Entries.

Explanation of Solution

To record the entry for improvement made in equipment on Jan 1 2016.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan 1,2016	Equipment		27,670
	Cash			27,670
	(To record the cash purchases)

Table (1)

• Equipment is an asset account. Equipment account increases as the new equipment is bought to the business, hence the asset increases and all the assets are debited as their values increases.
• Cash account is an asset account. Cash account decreases as the amount paid to purchase the equipment has been paid in cash, hence the asset decreases and all the assets are credited as their values decreases.

Working notes:

Computation of the total cost:

$\begin{array}{c}\text{Total}\text{cost}=\text{Purchase}\text{price}\text{of}\text{asset}+\text{Sales}\text{tax}\\ =\$25,680+\$1,810\\ =\$27,670\end{array}$

The total cost of the equipment is $27,670.

Record Betterment of loader on Jan 3 2016.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan 3,2016	Equipment		1,850
	Cash			1,850
	(To record the betterment of loader)

Table (2)

• Equipment is an asset account. Equipment account increases as the betterment of loader will be added to the equipment; hence the asset increases and all the assets are debited as their values increases.
• Cash account is an asset account. Cash account decreases as the amount paid to purchase the equipment has been paid in cash, hence the asset decreases and all the assets are credited as their values decreases.

Record depreciation charged on equipment.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31,2016	Depreciation		6,684
	Accumulated Depreciation			6,684
	(To record the depreciation)

Table (3)

• Depreciation is an expense account. Depreciation account increases the balance of expense account and all the losses and expenses accounts are debited.
• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and is increasing as the depreciation is transferred to this account. This is the reason it is credited.

Working Notes:

Computation of total salvage value:

$\begin{array}{c}\text{Total}\text{Salvage}\text{value}=\text{Salvage}\text{value}\text{of}\text{Equipment}+\text{Salvage}\text{value}\text{of}\text{loader}\\ =\$3,670+\$1,850\\ =\$3,900\end{array}$

Total salvage value is $3,900

Computation of the amount to be depreciated:

$\begin{array}{c}\text{Cost}\text{to}\text{be}\text{depreciated}=\left(\text{Actual}\text{cost}+\text{Loader}\text{cost}\right)-\text{Total}\text{salvage}\text{value}\\ \text{=}\left(\$27,670+\$1,850\right)-\$3,900\\ =\$29,520-\$3,900\\ =\$25,620\end{array}$

Total cost to be depreciated is $\$25,620$ .

Computation of depreciation:

$\begin{array}{c}\text{Depreciation}=\frac{\left(\text{Cost}\text{of}\text{the}\text{asset}-\text{Residual}\text{value}\right)}{\text{Useful}\text{life}}\\ =\frac{\$25,620}{5}\\ =\$5,124\end{array}$

Hence, the depreciation that will be charged in 2016 is $5,124.

2017

Record the entry for improvement of equipment.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan 1, 2017	Equipment		2,064
	Cash			2,064
	(To record the Improvement in equipment)

Table (4)

• Equipment is an asset account. Equipment account increases as the improvement in equipment increases the useful life of the equipment; hence the asset increases and all the assets are debited as their values increases.
• Cash account is an asset account. Cash account decreases as the amount paid to purchase the equipment has been paid in cash, hence the asset decreases and all the assets are credited as their values decreases.

Record the entry for repairs.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Jan 17, 2017	Repairs on Equipment		800
	Cash			800
	(To record the repairs)

Table (5)

• Repairs on equipment are an expense account. Repairs account increases as the expenses have been made to the equipment and it is debited as all the expenses and losses are debited according to the accounting rule.
• Cash account is an asset account. Cash account decreases as the amount of repairs are paid in cash, hence the asset decreases and all the assets are credited as their value decreases.

Record depreciation charged on equipment.

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Dec 31,2017	Depreciation		4,200
	Accumulated Depreciation			4,200
	(To record the depreciation)

Table (6)

• Depreciation is an expense account. Depreciation account increases the balance of expense account and all the losses and expenses accounts are debited.
• Accumulated Depreciation account is a contra asset account. Accumulated depreciation has a credit balance and is increasing as the depreciation is transferred to this account. This is the reason it is credited.

Working Notes:

Computation of actual cost of the asset at the end of 2017:

$\begin{array}{c}\text{Actual}\text{Cost}=\left(\begin{array}{c}\left(\text{Cost}\text{of}\text{the}\text{asset}-\text{Depreciation}\text{in}2016-\text{Total}\text{scrap}\text{value}\right)\\ +\left(\text{Improvement}\text{Cost}\right)\end{array}\right)\\ \text{=}\left(\$29,520-\$5,124-\$3,900\right)+\$2,064\\ =\$20,506+\$2,064\\ =\$22,560\end{array}$

Actual cost of the asset at the end of 2017 is $22,560.

Computation of total expected life of the asset:

$\begin{array}{c}\text{Expected}\text{Life}=\text{Original}\text{Life}-\text{Years}\text{used}+\text{Increase}\text{in}\text{life}\\ =5\text{years}-1\text{year}+2\text{years}\\ =\text{6}\text{years}\end{array}$

Expected Life of equipment is 6 years.

Computation of depreciation in 2017:

$\begin{array}{c}\text{Depreciation}=\frac{\left(\text{Cost}\text{of}\text{the}\text{asset}-\text{Residual}\text{value}\right)}{\text{Useful}\text{life}}\\ =\frac{\$22,560}{6}\\ =\$3,760\end{array}$