Siniaro - Long-Term Asset Acquisition Emmett & Gracie (E & G) is considering a s
ID: 2420005 • Letter: S
Question
Siniaro - Long-Term Asset Acquisition
Emmett & Gracie (E & G) is considering a significant equipment replacement. E & G would like to replace some of their equipment before December 31, 2016. The equipment originally cost $840,000 and the equipment’s accumulated depreciation balance at the end of 2015 is will be $790,000. At this point the equipment is depreciated to its salvage value.Your long-term asset accountant, Joe, tells you about this equipment option 4 as follows:
4. overhaul the old equipment.
The estimated life of any new equipment is 7 years.
E & G would like you to analyze option 2 to determine the financial impact of this decision and any non-financial considerations that may result from this decision. Additional information about option 4 is presented below:
Option 4: Overhaul the existing equipment. The following expenses are anticipated under this approach: (1) The normal annual cost for lubrication and replacement of minor parts to maintain the integrity of the exterior body would be $55,000. (2) The cost of re-wiring interior components in an overhaul would be $250,000. (3) Replacing old worn components would cost $148,000 with associated labor costs of $310,000 for installation. The overhaul is estimated to extend the useful life of the equipment another four years. (The present equipment’s original useful life was eight years, starting January 1, 2007.) The costs will be financed at the end of 2016 through a one-year loan for at 10%.
Instructions: (A) Prepare jounral entries in general journal form for option 4 and (B) explain on how option 4 affects the finacial statments and the strengths and weaknesses of this option.
Explanation / Answer
Note- Annual Lubricant Cost will inncur every year hence it is revenue expenditure and should not be capitalized.
As given that the cost will be financed at end of 2016 through 1 year 10% loan, so i have paid expenses directly from loan payble, Alternatively we can pass journal entry with cash payment first then entry for Loan payble.
B- It will effect Financial Statement as Follows-
1- Profit shall be Decreased by Annual Lubricant Cost 55000 and Annual Depreciation on 708000.
2. Liabilities Side of Balance Sheet will Increased by 1 Year 10%Loan 763000.
3. Assets Side of Balance sheet also increased by Amount Capitalized for Equipment.
Account Head Debit Credit Repair and Maintainence $55,000.00 10% Loan Payble $55,000.00 Equipment $250,000.00 10% Loan Payble $250,000.00 Equipment $458,000.00 10% Loan Payble $458,000.00 Componant cost and labour cost capitalized