On January 1, 20X6, Outback Air purchased a new engine for one of its airplanes
ID: 2463901 • Letter: O
Question
On January 1, 20X6, Outback Air purchased a new engine for one of its airplanes used to transport adventurers to remote regions of western Australia. The engine cost $750,000 and has a service life of 10,000 flight hours. Regulations require careful records of usage, and the engines must be replaced or rebuilt at the end of the 10,000 hour service period. Outback simply chooses to sell its used engines and acquire new ones. Used engines are expected to be resold for 1/3 of their original cost. Outback uses the units-of-output depreciation method. `
(a) "Assuming that the engine was used as follows, prepare a schedule showing annual depreciation expense, accumulated depreciation, and related calculations for each year.
20X6 1,500 hours
20X7 4,000 hours
20X8 3,000 hours
20X9 1,500 hours"
(b) Show how the asset and related accumulated depreciation would appear on a balance sheet at December 31, 20X7.
(c) Prepare journal entries to record the asset's acquisition, annual depreciation for each year, and the asset's eventual sale for $250,000.
Explanation / Answer
Answer a
Year
Hours worked
Per hour depreciation
Depreication expenses
Accumulate depreciation
2006
1500
50
75000
75000
2007
4000
50
200000
275000
2008
3000
50
150000
425000
2009
1500
50
75000
500000
Cost of the asset
750000
Service life in flight hours
10000
Sales value (1/3 of cost)
250000
Per flight hour depreciation (cost - sales value)/ life in flight hours
50
Answer b – balance sheet December 2007
Fixed assets:-
Engin 750000
(-)Accumulated depreciation -275000
Net fixed assets 475000
Answer c
Asset acquisition:-
Flight engine a/c Dr. 750000
To Bank a/c 750000
Yearly depreciation:-
Depreciation a/c Dr. 75000/200000/150000/75000
To Provision for depreciation a/c 75000/200000/150000/75000
Sale of engine :-
Provision for depreciation a/c Dr. 500000
To Flight engine a/c 500000
Bank a/c Dr. 250000
To Flight engine a/c 250000
Year
Hours worked
Per hour depreciation
Depreication expenses
Accumulate depreciation
2006
1500
50
75000
75000
2007
4000
50
200000
275000
2008
3000
50
150000
425000
2009
1500
50
75000
500000