On January 1, 2012, Jackson Company purchased factory equipment priced at $55,000. Sales tax was...
Question:
On January 1, 2012, Jackson Company purchased factory equipment priced at $55,000. Sales tax was an additional 6%, and the company spent $4,000 to install the machinery. After the company began using the machine (placed in service), there were additional costs of $800 for insurance and $1,200 for maintenance.
The estimated useful life of the machine was five years and the residual value was expected to be $6,300. The equipment is expected to produce 200,000 units during its useful life.
1. At what amount should Jackson record the purchase of the machine? What is the appropriate treatment for the maintenance and insurance?
2. Prepare the journal entry to record depreciation for 2012, assuming the company uses the straight-line method.
Property, Plant, and Equipment:
Property, plant, and equipment assets are the operating assets that companies use in their activities., These assets are reported in the long-term assets section of the balance sheet and carried at their depreciated cost prices.
Answer and Explanation: 1
1. The costs of the asset include all the expenses incurred to purchase the asset and get it ready for its intended use, but not the costs of operating the asset:
| Purchse price | $55,000 |
| Sales tax = $55,000 × 0.06 | 3,300 |
| Installation cost | 4,000 |
| Cost of the asset | $62,300 |
|---|
The insurance and maintenance expenses are running costs, and they should be expensed in the period they are incurred.
2. We will calculate the depreciation expense and then prepare the journal entry:
| Cost of the asset | $62,300 |
| Residual value | (6,300) |
| Depreciable amount | $56,000 |
| Esitmated useful life | 5 years |
| Annula depreciation = $56,000 / 5 | $11,200 |
| Depreciation for 2012 = 12 months | $11,200 |
|---|
The journal entry is:
| Date | Description | Debit | Credit |
|---|---|---|---|
| Dec 31 2012 | DR Depreciation expense | $11,200 | |
| CR Accumulated Depreciation | $11,200 | ||
| To record depreciation for 2012 |
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