Onslow Co. purchases a used machine for $240,000 cash on January 2 and readies it for use the next day at an $10,000 cost. On January 3, it is installed on a required operating platform costing $2,000, and it is further readied for operations. The company predicts the machine will be used for six years and have a $28,800 salvage value. Depreciation is to be charged on a straight-line basis. On December 31, at the end of its fifth year in operations, it is disposed of.
1. Prepare journal entries to record the machine's purchase and the costs to ready and install it. Cash is used for all costs incurred.
Record the the costs of $10,000 cash incurred on the used machine
Record the costs of $2,000 for an operating platform
2
2. Prepare journal entries to record depreciation of the machine at December 31.
(a) Its first year in operation.
(b) The year of its first disposal

Answer:

A. 2-Jan

Dr Machinery $240,000

Cr Cash $240,000

3-Jan

Dr Machinery $10,000

Cr Cash $10,000

3-Jan

Dr Machinery $2,000

Cr Cash $2,000

B. Dec 31

Dr Depreciation expense- machinery $37,200

Cr Accumulated Depreciation- machinery $37,200

Dec 31

Dr Depreciation expense- machinery $37,200

Cr Accumulated Depreciation- machinery $37,200

Explanation:

A. Preparation of the journal entries to record the machine's purchase and the costs to ready and install it

2-Jan

Dr Machinery $240,000

Cr Cash $240,000

(Being machinery purchased)

3-Jan

Dr Machinery $10,000

Cr Cash $10,000

(Being expenses paid for machinery readies)

3-Jan

Dr Machinery $2,000

Cr Cash $2,000

(Being installation charges paid)

B. Preparation of journal entries to record depreciation of the machine at December 31.

Dec 31

Dr Depreciation expense- machinery $37,200

Cr Accumulated Depreciation- machinery $37,200

[($252,000 - $28,800) / 6]

($240,000+$10,000+$2,000=$252,000)

Dec 31

Dr Depreciation expense- machinery $37,200

Cr Accumulated Depreciation- machinery $37,200

[($252,000 - $28,800) / 6]

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New Line Cinema is considering producing a new movie. To evaluate the proposal, the company needs to calculate its cost of capital. The firm has collected the following information:

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On January 1, 2021, Ellison Company granted Sam Wine, an employee, an option to buy 1,000 shares of Ellison Co. stock for $30 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $6,000. Wine exercised his option on October 1, 2021 and sold his 1,000 shares on December 1, 2021. Quoted market prices of Ellison Co. stock in 2021 were:

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