Question

Champion Contractors completed the following transactions and events involving the purchase and operation of equipment in its business.

2016
Jan. 1 Paid $306,000 cash plus $12,240 in sales tax and $1,900 in transportation (FOB shipping point) for a new loader. The loader is estimated to have a four-year life and a $30,600 salvage value. Loader costs are recorded in the Equipment account.
Jan. 3 Paid $7,000 to enclose the cab and 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.
2017
Jan. 1 Paid $4,300 to overhaul the loader’s engine, which increased the loader’s estimated useful life by two years.
Feb. 17 Paid $1,075 to repair 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.

Answer 1

Answer and Explanation:

The journal entries are shown below:

On Jan 1 2016

Equipment $320,140 ($306,000 + $12,240 + $1,900

To Cash $320,140

(Being the cash paid is recorded)

On Jan 3 2016

Equipment $7,000

To Cash $7,000

(Being the cash paid is recorded)

On Dec 31 2016

Depreciation Expense - Equipment $73,610

To Accumulated depreciation-Equipment $73,610

(being the depreciation expense is recorded)

On Jan 1 2017

Equipment $4,300

To Cash $4,300

(Being the cash paid is recorded)

On Feb 17 2017

Repair Expense - Equipment $1,075

To Cash $1,075

(Being the cash paid is recorded)

On Dec 31 2017

Depreciation Expense - Equipment $45,026

To Accumulated depreciation - Equipment $45,026

(being the depreciation expense is recorded)

Working notes.

1.

Equipment Cost $320,140

Additional cost $7,000

Total Cost $327,140

Less salvage value ($30,600 + $2,100) $32,700

Cost to be depreciated $294,440

Annual depreciation ($294,440 ÷ 4 years) $73,610

2. Total Cost ($327,140 + $4,300) $331,440

Less accumulated depreciation -$73,610

Book value $257,830

Less salvage -$32,700

Cost to be depreciated $225,130

Revised left useful life (4 - 1 + 2) 5

Revised annual depreciation ($225,130 ÷ 5 yrs) $45,026