Question

Champion Contractors completed the following transactions involving equipment. Year 1 Jan. 1 Paid $318,000 cash plus $12,720 in sales tax and $1,500 in transportation (FOB shipping point) for a new loader. The loader is estimated to have a four-year life and a $31,800 salvage value. Loader costs are recorded in the Equipment account. Jan. 3 Paid $7,000 to install air conditioning in the loader to enable operations under harsher conditions. This increased the estimated salvage value of the loader by another $2,100. Dec. 31 Recorded annual straight-line depreciation on the loader. Year 2 Jan. 1 Paid $4,200 to overhaul the loader's engine, which increased the loader's estimated useful life by two years. Feb. 17 Paid $1,050 for minor repairs to the loader after the operator backed it into a tree. Dec. 31 Recorded annual straight-line depreciation on the loader. Required: Prepare journal entries to record these transactions and events. View transaction list Journal entry worksheet 2 3 4 5 6 Paid $318,000 cash plus $12,720 in sales tax and $1,500 in transportation (FOB shipping point) for a new loader. The loader is estimated to have a four- year life and a $31,800 salvage value. Loader costs are recorded in the Equipment account. Note: Enter debits before credits. Date General Journal Debit Credit Jan 1, Year 1 Record entry Clear entry View general journal

Answer 1

Solution

Journal Entry Worksheet

1. Since as per accounting principles, total cost of purchase of asset including sales tax and any amount paid for transportation is to be capitalized, total amount of $ 332,220 (318,000+12,720+1,500) would be capitalized as cost of loader. Hence, entry would be as follows.

Date	General Journal	Debit	Credit
Jan 1, Year 1	Equipment Account	$332,220
	Cash		$332,220

2. As per accounting principles, any cost incurred on an asset which results in enhanced operational capacity or increases the useful life of that asset is to be capitalized and added to the cost of asset. As as result, amount of $ 7,000 will be capitalized and entry will be as follows.

Date	General Journal	Debit	Credit
Jan 3, Year 1	Equipment Account	$7,000
	Cash		$7,000

3. Straight Line depreciation of an asset is calculated by deducting the salvage value of asset from its total cost and applying the depreciation rate calculated by dividing 1 by years of useful life. Here, total cost of asset is $339,220 and salvage value is $33,900. So, net value comes to $305,320. Now, useful life of loader is 4 years. So, depreciation rate will be 25% (1/4) and depreciation amount will be $305,320 x 25% = $76,330. Below is the entry.

Date	General Journal	Debit	Credit
Dec 31, Year 1	Depreciation Account	$76,330
	Accumulated Depreciation Account		$76,330

4. As explained above, cost incurred resulting in increase in useful life should be capitalized. So, $4,200 paid for engine overhaul increasing useful life of loader by 2 years will be capitalized. Entry will be as follows.

Date	General Journal	Debit	Credit
Jan 1, Year 2	Equipment Account	$4,200
	Cash		$4,200

5. Minor repairs of $1050 incurred on small damage is a revenue expense and will be charged to revenue account. Below is the entry.

Date	General Journal	Debit	Credit
Feb 17, Year 2	Repair Expense Account	$1,050
	Cash		$1,050

6. Since, there is addition of cost by $4,200 and life is increased by 2 years, straight Line depreciation will be recomputed after adjusting for above changes and reducing the cost by year 1 depreciation of $76,330. Hence, recomputed net value will be $233,190 ($305,320+4,200-76,330). Now, remaining useful life of loader is 5 years. So, depreciation rate will be 20% (1/5) and depreciation amount will be $233,190 x 20% = $46,638. Below is the entry.

Date	General Journal	Debit	Credit
Dec 31, Year 2	Depreciation Account	$46,638
	Accumulated Depreciation Account		$46,638