Patterson Company pays $265,600 for equipment expected to last four years and ha
ID: 2419857 • Letter: P
Question
Patterson Company pays $265,600 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 equipment’s life, $25,750 cash is paid for a new component expected to increase the equipment’s productivity by 10% a year. (Omit the "$" sign in your response.)
General Journal
Debit
Credit
2.
During the third year, $6,438 cash is paid for normal repairs necessary to keep the equipment in good working order. (Omit the "$" sign in your response.)
General Journal
Debit
Credit
3.
During the fourth year, $18,700 is paid for repairs expected to increase the useful life of the equipment from four to five years. (Omit the "$" sign in your response.)
General Journal
Debit
Credit
Patterson Company pays $265,600 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.
Explanation / Answer
Answer:
The problem is related to the treatment of amount spent on fixed assets / equipment during the life of equipment.
The amount spent on equipment is to be capitalised in the amount of fixed assets & depreciated over the expected useful life of equipment if :
--- it will increase the expected useful life of equipment or
--- it will Increase the efficiency/productivity of equipment/fixed assets.
The amount spent other than above purposes, will be treated as revenue expenditure and charged to profit & loss as expenses.
Hence, the journal entries to record the following costs related to the equipment.as follows:
1) $25,750 cash is paid for a new component expected to increase the equipment’s productivity by 10% a year (the amount is capitalised in equipment value since it will increase the productivity of equipment)
Equipment A/c Dr. $25,750
To Cash $25,750
(Being amount paid for a new component is capitalised)
2) $6,438 cash is paid for normal repairs necessary to keep the equipment in good working order
The amount spent for normal repairs is a revenue expenditure and treated as expenses in profit & loss A/c
Journal Entry
Repair & Maintanance A/c (Profit & LOss A/c) Dr. $6,438
To Cash $6,438
(being amount spent on repair of equipment -- recorded)
3) $18,700 is paid for repairs expected to increase the useful life of the equipment from four to five years.
PUrpose --- To increase the useful life of equipment..hence capitalised in the value of equipment/fixed assets
Equipment A/c Dr. $10,700
To Cash Paid
(Being amount paid toward equipment to increase the useful life of assets is capitalised)