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.

Step by step solution

01

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:

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

02

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:

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

03

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:

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

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