Question

Watmore Ltd. purchased, for cash, factory equipment with an invoice price of $80,000. Other costs incurred were freight costs, $1,600; installation, wiring and foundation, $13,500; material and labour costs in testing equipment, $500; oil lubricants and supplies to be used while operating the equipment, $750; fire insurance policy covering equipment, $1,400. The equipment is estimated to have a $10,000 residual value at the end of its 8-year useful service life.

Instructions
(a) Calculate the cost of the equipment.
(b) Record the purchase of the equipment.
(c) Calculate the annual depreciation expense, assuming the straight-line method of depreciation is used.

Answer 1

a. The cost of the equipment = Invoice price + Freight cost + Installation wiring and foundation cost + Material and labor cost in testing equipment

The cost of the equipment = $80000 + $1600 + $13500 + $500

The cost of the equipment = $95,600

b. Journal Entry to record the purchase of the equipment

Equipment $95,600 - Debit

To Cash $95,600 - Credit

c. Annual depreciation expense =(Cost of equipment - Salvage value) / Useful life

Annual depreciation expense = ($95,600 - $10,000) / 8

Annual depreciation expense = $85,600 / 8

Annual depreciation expense = $10,700