On April 1, 2016, the KB Toy Company purchased equipment to be used in its manufacturing process. The equipment cost $57,200, has an ten-year useful life, and has no residual value. The company uses the straight-line depreciation method for all manufacturing equipment.

On January 4, 2018, $14,750 was spent to repair the equipment and to add a feature that increased its operating efficiency. Of the total expenditure, $2,900 represented ordinary repairs and annual maintenance and $11,850 represented the cost of the new feature. In addition to increasing operating efficiency, the total useful life of the equipment was extended to 12 years.

Required:

1. Prepare journal entries for the depreciation for 2016 and 2017.

2. Prepare journal entries for the 2018 expenditure.

3. Prepare journal entries for the depreciation for 2018.

1. Journal Entry for December 31, 2016

Depreciation Expense Debit $ 4,290

Allowance for depreciation Equipment Credit $ 4,290

Journal Entry for December 31, 2017

Depreciation Expense Debit $ 5,720

Allowance for depreciation Equipment Credit $ 5,720

Journal entry

2. Repairs and Maintenance Expense Debit $ 2,900

Equipment Debit $ 11,850

Cash Credit $ 14,750

3. Depreciation Expense Debit $ 5,904

Allowance for depreciation Equipment Credit $ 5,904

Explanation:

Computation of depreciation for 2016 and 2017

Original cost of equipment $ 57,200

Salvage Value $ 0

Depreciable Basis $ 57,200

Useful Life 10 years

Annual depreciation $ 57,200 / 10 years $ 5,720

Depreciation for 2016 from April - December 9 months $ 4,290

Depreciation for 2017 = Full Year $ 5,720

Computation of Depreciation for 2018

Depreciation for Jan to December 2018

Original Cost of equipment $ 57,200

Less: Depreciation for 1 year 9 months $ (10,010)

Net book value as at January 01 2018 $ 47,190

Add: New Feature adding value to equipment $ 11,850

Revised Depreciation Base $ 59,040

Revised remaining useful life (12 - 2) 10 years

Depreciation for full year $ 5,904

Depreciation for 2018 $ 5,904

2016 Depreciation

Dr depreciation expense $5720

Cr Accumulated depreciation $5720

2017 Depreciation

Dr depreciation expense $5720

Cr Accumulated depreciation $5720

Journal entries for 2018 expenditure

Dr repairs and maintenance $2900

Dr Equipment account $11850

Cr Cash account $14750

2018 Depreciation

Dr depreciation expense $4800.83

Cr Accumulated depreciation $4800.83

Explanation:

There are two policies for depreciating non-current asset especially when it is acquired part-way through the year like we have here, namely full year depreciation in the year of purchase and none in the year of disposal or proportional depreciation throughout the useful life, I am adopting the former in this question.

Formula for depreciation=cost-residual value/useful life

Yearly depreciation is ($57200-$0) / 10=$5720

However, after two years the book value is calculated thus:

Book value=$57200 - ($5720*2) = $45760

additional cost incurred in enhancing the capacity of the asset would be added : $45760 + $11,850=$57610

Since the useful life has also been reviewed up to 12 years, the depreciation from now on is $57610/12=$4800.83