Question

Jan 1, 2018 Acquired Equipment for $900,000, paying $100,000 as down payment and agreeing to pay the balance in four equal annual instalments. The equipment has 10 year life and a salvage value of $200,000. Make necessary entries in the year of purchase and in 2019.

Answer 1

Note: We are assuming that no finance cost(interest) is paid for the instalment amounts, as no interest rate is mentioned in the question.

Entry in the year of purchase,

1. On the date of purchase.

Equipment account Dr $900,000

Cash/Bank account Cr $100,000

Vendor account Cr $800,000

On the balance sheet date.

Depreciation = (cost - salvage value)/number of useful years = ($900,000-$200,000)/10 = $70,000.

Depreciation account Dr $70,000

Equipment account Cr $70,000

2. In 2019,

Balance of $800,000 in four equal installments = $200,000

Vendor account Dr $200,000

Cash/bank account Cr $200,000

Then for depreciation,

Depreciation account Dr $70,000

Equipment account Cr $70,000