On January 1, 20X6, Outback Air purchased a new engine for one of its airplanes
ID: 2563158 • 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.
(a)
Year Annual Expense Accumulated
Depreciation at End of Year Annual
Expense Calculation
X6
X7
X8
X9
(b)
Property, Plant & Equipment (20X7)
Aircraft engine
Less: Accumulated depreciation
(c) GENERAL JOURNAL
Date Accounts Debit Credit
1-Jan
To record the purchase of engine
31-Dec
20X6
To record 20X6 depreciation
31-Dec
20X7
To record 20X7depreciation
31-Dec
20X8
To record 20X8 depreciation
31-Dec
20X9
To record 20X9 depreciation
31-Dec
20X9
To record disposal of asset
Explanation / Answer
(a) Year Annual Expense Accumulated Depreciation at End of Year Annual Expense Calculation Year Hours used Depreciation Accumlated Deprciation 20X6 1500 75,000 75,000 20X7 4000 2,00,000 2,75,000 20X8 3000 1,50,000 4,25,000 20X9 1500 75,000 5,00,000 Depreciation Per unit = Cost of Asset - Salvage value / No.of hours usage =$750,000 - $250,000/ 10,000 Hours = $ 50 per Hour (b) Property, Plant & Equipment (20X7) Aircraft engine $750,000 Less: Accumulated depreciation $275,000 Net Block $475,000 (c) GENERAL JOURNAL Date Accounts Debit Credit 1-Jan -20X6 Air craft Engine $750,000 Cash/Bank $750,000 To record the purchase of engine 31-Dec -20X6 Depreciation Expense $75,000 Accumulated Depreciation $75,000 To record 20X6 depreciation 31-Dec -20X7 Depreciation Expense $200,000 Accumulated Depreciation $200,000 To record 20X7depreciation 31-Dec -20X8 Depreciation Expense $150,000 Accumulated Depreciation $150,000 To record 20X8 depreciation 31-Dec -20X9 Depreciation Expense $75,000 Accumulated Depreciation $75,000 To record 20X9 depreciation 31-Dec -20X9 Cash/Bank $250,000 Accumulated Depreciation $500,000 Air craft Engine $750,000 To record disposal of asset