During Year 1, Ashkar Company ordered a machine on January 1 at an invoice price of $26,000. On the date of delivery, January 2, the company paid $7,000 on the machine, with the balance on credit at 12 percent interest due in six months. On January 3, it paid $1,200 for freight on the machine. On January 5, Ashkar paid installation costs relating to the machine amounting to $2,900. 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 $3,100.

During Year 1, Ashkar Company ordered a machine on January 1 at an invoice price of $26,000. On the date of delivery, January 2, the company paid $7,000 on the machine, with the balance on credit at 12 percent interest due in six months. On January 3, it paid $1,200 for freight on the machine. On January 5, Ashkar paid installation costs relating to the machine amounting to $2,900. 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 $3,100.


1. Indicate the effects (accounts, amounts, and + or − ) of each transaction on the accounting equation. Use the following schedule:

 

Explanation:

1.

Stockholders' Equity:

Interest expense = ($19,000 principal × 0.12 interest rate × 6/12 of a year) = $1,140 interest

2. Compute the acquisition cost of the machine.
 


3. Compute the depreciation expense to be reported for Year 1.
 

Explanation:

3.

Depreciation for year 1: ($30,100 cost − $3,100 residual value) × 1/10 = $2,700

  5. What would be the net book value of the machine at the end of Year 2?

Explanation:

5.

Accumulated depreciation ($2,700 × 2 years) = $5,400

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