Oki Company pays $264,000 for equipment expected to last four years and have a $29,000 salvage value. Prepare journal entries to record the following costs related to the equipment. 1. During the second year of the equipment's life, $22,000 cash is paid for a new component expected to increase the equipment's productivity by 10% a year. 2. During the third year, $6,250 cash is paid for normal repairs necessary to keep the equipment in good working order. 3. During the fourth year, $14,870 is paid for repairs expected to increase the useful life of the equipment from four to five years.

Answer and Explanation:

Any additional cost incurred on account of improving the performance of long term asset is called capital improvement.

1. New component was purchased to improve the efficiency of the equipment.

Journal entry:

Particulars Debit Credit

Equipment $22,000

Cash $22,000

(Being component purchased for cash)

Equipment is debited as capital improvements are made.

2. In the third year, some repair expense incurred for maintaining the efficiency of equipment.

Journal entry:

Particulars Debit Credit

Repair expense $6,250

Cash $6,250

(Being repair expense incurred and paid in cash)

increase in expenses is debited and decrease in asset (cash) is credited.

3. Since repairs is improving the useful life of the equipment, it is considered capital improvement, so the same will be charged to the equipment.

Journal entry:

Particulars Debit Credit

Equipment $14,870

Cash $14,870

(Being repair expense charged to equipment)