Question

On March 20, 2020, Fine Touch Corporation purchased two machines at auction for a combined total cost of $210,000. The machines were listed in the auction catalogue at $110,000 for machine X and $ 155,000 for machine Y. Immediately after the auction, Fine Touch had the machines professionally appraised so it could increase its insurance coverage. The appraisal put a fair value of $106,650 on machine X and $130,350 on machine Y. On March 24, Fine Touch paid a total of $5,000 in transportation and installation charges for the two machines. No further expenditures were made for machine X, but $5,900 was paid on March 29 for improvements to machine Y. On March 31, 2020, both machines were ready to be used. The company expects machine X to last five years and to have a residual value of $3,900 when it is removed from service, and it expects machine Y to be useful for eight more years and have a residual value of $13,750 at that time. Due to the different characteristics of the two machines, different depreciation methods will be used for them: machine X will be depreciated using the double-diminishing-balance method and machine Y using the straight-line method. Prepare the journal entry to record the purchase of the machines, indicating the initial cost of each. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round percentage to 1 decimal place, for e.g. 40.1 and Round answers to the nearest whole dollar, e.g. 5,275. If no entry is required, select "No Entry" for the account titles and enter for the amounts.) Debit Credit Date Account Titles and Explanation Mar. 20

Answer 1

Journal entries:

Date	Account title and explanation	Debit	Credit
Mar 24	Machine X	$96,750
	Machine Y	$118,250
	Cash		$215,000
	[To record purchase of assets]
Mar 29	Machine Y	$5,900
	Cash		$5,900
	[To record improvements to machine]
Dec 31	Depreciation expense-Machine X	$13,928
	Depreciation expense-Machine Y	$10,350
	Accumulated depreciation-Machine X		$13,928
	Accumulated depreciation-Machine Y		$10,350
	[To record depreciation expense]

Calculations:

i.Fair value ratio:

Fair value
Machine X	$106,650	45%
Machine Y	$130,350	55%
Total	$237,000	100%

So that, Total Cost of machines should be allocated in the fair value ratio.

ii.Total cost:

Cost	$210,000
Transportation and installation costs	$5,000
Total cost	$215,000

iii.Allocation of Total cost:

Total Cost
Machine X	$96,750	45%
Machine Y	$118,250	55%
Total	$215,000	100%

iv. Depreciation expense:

Depreciation expense on Machine X = [(96,750 cost-3,900 salvage value)/5 years] x (9 months/12 months)

= (92,850/5) x 9/12

= 18,570 x 9/12

= 13,928

Depreciation expense on Machine Y = [124,150 cost*-13,750 salvage value)/8 years] x (9 months/12 months)

= (110,400/8) x 9/12

= 13,800 x 9/12

= 10,350

*Cost of Machine Y = $118,250+$5,900 improvements = $124,150