Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / On 1 January 2015, Palestine company Purchased a paper cup manufacturing machine for $17,500
On 1 January 2015, Palestine company Purchased a paper cup manufacturing machine for $17,500. the following expenses related to the purchase: sales tax of $1,500. Assemble and installation $500. Check and inspection $500. The useful life of the machine was estimated at 5 years and the salvage value was $2,000. Required : 1-record the journal for the purchase transaction 2-Calculate the depreciation expense for 2015 ,2016 assume the company uses the sum of years digit. 3-On 1/1/2017 The company decided to impair machine due to low productivity productivity. its market value was estimated at $5,000 and future cash flows of $6,000. calculate the loss on impairment.
Total cost of machine = cost of machine + capitalized expenses.
Expenses which are incurred to put the asset in use are to be capitalized and later depreciated in the following years.
As sales tax , assemble and installation and inspection are related to putting the asset in use. These expenses will be capitalized.
Total cost of machine = $17,500 + $1,500 + $500 + $500
Total cost of machine = $20,000
Life of asset = 5 years
Salvage value = $2,000
(1) journal entry for purchase of machinery
| Date | Particular | Debit | Credit |
| 1 Jan 15 | Machinery account | $17,500 | |
| Sales tax expense | $1,500 | ||
| Assemble and installation expense | $500 | ||
| Inspection expense | $500 | ||
| Cash account | $20,000 | ||
| (Being machinery purchased) | |||
| 1 Jan 15 | Machinery Account | $2,500 | |
| Sales tax expense | $1,500 | ||
| Assemble and installation expense | $500 | ||
| Inspection expense | $500 | ||
| (Being expenses related to machinery capitalized) |
(2) calculation of depreciation using sum of the year digit method:
Total life of asset = 5
Sum of the years = 1+2+3+4+5
Sum of the years = 15
Depreciation expense = (life of asset remaining/sum of the years) * (total cost of asset - salvage value)
Depreciation for 2015 = (5/15) * ($20,000-$2,000)
Depreiation for year 2015 = 0.333 * $18,000
Depreciation for year 2015 = $6,000
Depreciation for 2016 = (4/15) * ($20,000-$2,000)
Depreciation for year 2016 = 0.2667 * $18,000
Depreciation for year 2016 = $4,800
(c) Loss on Impairment calculation:
Book value of Asset on 1 Jan 2017 = Total cost of asset - depreciation expense for 2015 - depreciation expense for 2016
Book value of asset on 1 Jan 2017 = $20,000 - $6,000 - $4,800
Book value of asset on 1 Jan 2017 = $9,200
Impairment loss expenses according to US GAAP can only be incurred if the future cash flows of the asset is less than the asset's book value.
As future cash flow of the asset = $6,000 which is less than the book value of the asset on 1 Jan 2017.
Hence impairment loss can be incurred.
Impairment loss of machinery = Book value of asset as on 1 Jan 2017 - market value of asset on the same date.
Impairment loss of machinery = $9,200 - $5,000
Loss on impairment = $4,200
