Final answer:
To record the purchase of equipment using the Horizontal model, Mackenzie Manufacturing would debit the equipment account for the total cost of $174,500 (adding purchase price, shipping charges, and installation costs), and credit cash or accounts payable for the same amount. The residual value of the equipment is not factored into this initial journal entry but is considered when calculating depreciation.
Step-by-step explanation:
The student has asked about recording the purchase of equipment on Mackenzie Manufacturing's books, specifically using the Horizontal model to account for the total cost. To calculate the total cost of the equipment, we must consider the purchase price, shipping charges, and installation and foundation costs. The total cost can be calculated as follows:
- Purchase price of equipment: $160,000
- Shipping charges: $2,000
- Installation and foundation costs: $12,500
Adding these up gives a total cost of $174,500. This amount would be recorded as an increase in the equipment account (a non-current asset) in the books of Mackenzie Manufacturing, while the cash or accounts payable (whichever is used to settle this purchase) would decrease by the same amount. The Horizontal model, useful for showing the effects on the balance sheet, would represent this as:
Assets = Liabilities + Equity
+ Equipment $174,500 = - Cash/Accounts payable $174,500
It's crucial to note that the residual value is not considered in the initial cost recordation of the equipment but will later be used to calculate depreciation expense over its useful life.