Question

Oki Company pays $277,200 for equipment expected to last four years and have a $30,000 salvage value. Prepare journal entries to record the following costs related to the equipment.

1. During the second year of the equipmentâs life, $14,400 cash is paid for a new component expected to increase the equipmentâs productivity by 10% a year.
2. During the third year, $3,600 cash is paid for normal repairs necessary to keep the equipment in good working order.
3. During the fourth year, $7,350 is paid for repairs expected to increase the useful life of the equipment from four to five years.

Answer 1

Please see explanation

Step-by-step explanation:

1. Since the new component purchased by Oki Company for equipment has increased the productivity by 10%, therefore it shall be capitalized and accordingly the following journal entry shall be made:

Debit Credit

Equipment $14,400

Cash $14,400

2.The journal entry in respect of normal repairs expense incurred for the purpose of good working of equipment shall be made as follows:

Debit Credit

Repair expense $3,600

Cash $3,600

3. Since the repair expense in the fourth year has increase the life of equipment from four to five years, therefore, such repair expense shall be capitalized instead of expensed off and the following journal entry shall be recognised:

Debit Credit

Equipment $7,350

Cash $7,350