During Year 1, Ashkar Company ordered a machine on January 1 at an invoice price of $24,000. On the date of delivery, January 2, the company paid $8,000 on the machine, with the balance on credit at 9 percent interest due in six months. On January 3, it paid $700 for freight on the machine. On January 5, Ashkar paid installation costs relating to the machine amounting to $2,500. On July 1, the company paid the balance due on the machine plus the interest. On December 31 (the end of the accounting period), Ashkar recorded depreciation on the machine using the straight-line method with an estimated useful life of 10 years and an estimated residual value of $3,200.

Required (round all amounts to the nearest dollar):
1. Indicate the effects (accounts, amounts, and + or -) of each transaction (on January 1, 2, 3, and 5 and July 1) on the
accounting equation. Use the following schedule:
Date Assets = Liabilities + Stockholders' Equity
2. Compute the acquisition cost of the machine.
3. Compute the depreciation expense to be reported for 2013.
4. What impact does the interest paid on the 10 percent note have on the cost of the machine? Under what circumstances can interest expense be included in acquisition cost?
5. What would be the net book value of the machine at the end of 2014?

Explanation:

1.

January 1 Assets - no effect; Liabilities - no effect; Stockholder's equity - no effect

January 2 Assets: Cash -$8000; Equipment + $24000

Liabilities: Short term note payable +$16000

January 3 Assets: Cash -$700; Equipment +$700

January 5 Assets: Cash -$2500; Equipment +$2500

July 1 Assets: Cash -$16720; Liabilities: Short term note payable - $16,000

Stockholders equity - $720

*(24,000-8,000)*0.09*6/12 = $720

2. Acquisition cost of the machine:

Cash paid $8,000

Note payable with supplier $16,000

Freight costs $700

Installation costs $2,500

Acquisition cost $27,200

3. Depreciation(2013) = ($27,200 - residual value of $3,200) *1/10= $24,000/10 = $2400

5. Equipment cost = $27,200

Less: Depreciation [$2400*2] $4800

net book value of the machine at the end of 2014 $22,400

Please refer to the explanation section

Explanation:

Date            Asset           =    Liabilities + stockholder's Equity

1 January   Machine 24000+ = Payable(liability) 24000+

2 January   Bank 8000 -    =  Payable (Liability) 8000 -

*3 January    Machine (freight cost) 700  +

                    Bank    700 -

*5 January    Machine (Installation cost) 2500 +

                    Bank    2500 -

**1 July           Bank    17440 -    =  Payable 17440 -

*freight cost and installation costs are capitalised to the cost of machinery. both freight costs and installation costs affect Machinery account and Bank Account. Machinery and Bank are assets therefore these transactions only affect the asset side of the equation

** amount payable + interest = (24000 - 8000) x 1.09 = 16000 x 1.09 = 17440

2. acquisition costs

Freight costs and installation costs are added (capitalised) to the costs of acquisition because they are costs necessary in delivering the asset to the clients premises and preparing the asset of its intended use

Cost Acquisition = 24000 + 700 + 2500 = 27200

Cost of the machinery = $ 27200

3. Effect of interest on cost of Machinery

The interest paid on the Balance payable has no effect on the cost of the machinery. interest paid only affects cost of the asset when it is capitalised. interest is capitalised when the company borrows funds to finance the construction of a long term asset or acquisition of a long term asset

4. Depreciation for 2013.

Depreciation = (Total cost of Machine - residual Value)/ useful life

depreciation = (27200 - 3200 = 24000)/10 = 2400

5. Book Value = Cost - Accumulated depreciation

   Accumulated depreciation = depreciation 2013 + depreciation 2014

  Accumulated depreciation = 2400 + 2400 = 4800

  Book Value = 27200 - 4800 = 22400

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