Question

Whitney Plumb Associates surveys American eating habits. The company’s accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each asset. During 2018, Whitney Plumb completed the following transactions:

Jan. 1 Purchased office equipment, \(117,000. Paid \)77,000 cash and financed the remainder with a note payable.

Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(350,000 paid in cash. An independent appraisal valued the land at \)275,625 and the communication equipment at \(91,875.

Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Whitney Plumb received \)390,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.

Dec. 31 Recorded depreciation as follows:

Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value. Office equipment is depreciated using the double-declining-balance method over five years with a \)2,000 residual value.

Record the transactions in the journal of Whitney Plumb Associates.

Short answer

Accumulated depreciation on communication equipment: $13,125

Accumulated depreciation on office equipment: $46,000

Step-by-step solution

Journal Entry for acquiring assets

Date	Particular	Debit	Credit
Jan 1.	Office Equipment	$ 117,000
	To Cash		$ 77,000
	To Notes Payable		40,000
	Being office equipment purchased partially with cash and partially on credit
Apr. 1	Land	$262,500
	Communication Equipment	$87,500
	To Cash		$350,000
	Being assets purchased on lump sum basis

Working:

$\begin{array}{rcl}\mathrm{Land}\mathrm{cost}& =& \mathrm{Lump}\mathrm{sum}\mathrm{cost}\times \frac{\mathrm{Appriasal}\mathrm{value}\mathrm{for}\mathrm{land}}{\mathrm{Total}\mathrm{appraisal}\mathrm{value}\mathrm{for}\mathrm{land}\mathrm{and}\mathrm{building}}\\ & =& \$350,000\times \frac{\$275,625}{\$275,625+\$91,875}\\ & =& \$350,000\times 0.75\\ & =& \$262,500\\ & & \\ \mathrm{Building}\mathrm{cost}& =& \mathrm{Total}\mathrm{lumps}\mathrm{sum}\mathrm{value}-\mathrm{Land}\mathrm{cost}\\ & =& \$350,000-\$262,500\\ & =& \$87,500\end{array}$

Journal entry for the sale of the building

Date	Particular	Debit	Credit
Sep 1.	Accumulated Depreciation – Building	$ 293,250
	Cash	390,000
	To Building		$ 520,000
	To Gain on sale		163,250
	Being building sold for gain

Working:

$\begin{array}{rcl}\mathrm{Partial}\mathrm{depreciation}\mathrm{for}2018& =& \frac{\mathrm{Cost}-\mathrm{Residual}\mathrm{value}}{\mathrm{Useful}\mathrm{life}}\times \frac{\mathrm{No}.\mathrm{of}\mathrm{months}\mathrm{in}\mathrm{use}}{12}\\ & =& \frac{\$520,000-\$25,000}{40}\times \frac{8}{12}\\ & =& \$8,250\end{array}$

Adjustment entries

Date	Particular	Debit	Credit
Dec 31.	Depreciation Expense– Communication equipment	$ 13,125
	To Accumulated Depreciation – Communication equipment		$ 13,125
	Being depreciation charged on equipment
Dec 31	Depreciation Expense– Office equipment	$ 46,000
	To Accumulated Depreciation – Office equipment		$ 46,000
	Being depreciation charged on office equipment

Working:

$\begin{array}{rcl}\mathrm{Depreciation}\mathrm{on}\mathrm{CE}& =& \frac{\mathrm{Cost}-\mathrm{Residual}\mathrm{value}}{\mathrm{Useful}\mathrm{life}}\times \frac{\mathrm{No}.\mathrm{of}\mathrm{months}\mathrm{in}\mathrm{use}}{12}\\ & =& \frac{\$87,500-\$0}{5}\times \frac{9}{12}\\ & =& \$13,125\\ & & \\ \mathrm{Depreciation}\mathrm{on}\mathrm{OE}& =& \frac{\mathrm{Cost}-\mathrm{Residual}\mathrm{value}}{\mathrm{Useful}\mathrm{life}}\times 2\\ & =& \frac{\$117,000-\$2,000}{5}\times 2\\ & =& \$46,000\end{array}$