Question

Wiater Company operates a small manufacturing facility. On January 1, 2018, an asset account for the company showed the following balances:

Equipment	$	310,000
Accumulated Depreciation (beginning of the year)		141,000

During the first week of January 2018, the following expenditures were incurred for repairs and maintenance:

Routine maintenance and repairs on the equipment	$	3,650
Major overhaul of the equipment that improved efficiency		42,000

The equipment is being depreciated on a straight-line basis over an estimated life of 10 years with a $28,000 estimated residual value. The annual accounting period ends on December 31.

Required:

1. Prepare the adjusting journal entry that would have been made at the end of 2017 for depreciation on the manufacturing equipment.

2. Starting at the beginning of 2018, what is the remaining estimated life?

3. Prepare the journal entries to record the two expenditures for repairs and maintenance during 2018.

Answer 1

Annual depreciation = (Cost price - Residual value)/Useful life

= (310,000 - 28,000)/10

= 282,000/10

= $28,200

Accumulated Depreciation (beginning of the year 2018) = $141,000

Number of years for which equipment has been used at the beginning of 2018 = Accumulated Depreciation (beginning of the year 2018)/Annual depreciation

= 141,000/28,200

= 5

Hence, remaining estimated life of equipment at the beginning of the year 2018 = 10 - 5

= 5 years

Journal

(i)	Maintenance and repairs expense	3,650
	Cash		3,650
(ii)	Equipment	42,000
	Cash		42,000

Major overhaul of the equipment $42,000 will be depreciated over the remaining useful life of the equipment.

Hence, annual depreciation expense from 2018 onward will be = 28,200 + 42,000/5

= 28,200 + 8,400

= $36,600

Journal

Dec. 31, 2018	Depreciation expense	36,600
	Accumulated Depreciation - Equipment		36,600