# Answered Essay: ABC Company purchases a new machine for cash. The machine costs are \$500,000. The company also must pay freight of \$1, 500 to get th

ABC Company purchases a new machine for cash. The machine costs are \$500,000. The company also must pay freight of \$1, 500 to get the machine delivered and \$2, 500 to get the machine installed. The equipment company has agreed to a 7% reduction in price if ABC accepts the machine by the end of June-which ABC has agreed to. ABC has decided to depreciate the machine by the double-declining method. It determines a there is salvage value of \$5000. The machine will be depreciated over 10 years. Record the journal entry for the purchase of the equipment for this year, and the journal entry that ABC will record next June for the first year of depreciation on the equipment.

Journal entry for the purchase of equipment this year will be:

Cost of machine 500,000

Less: Discount on purchase (7%) 35,000

Add: Freight Charges 1,500

Add: Installation charges 2,500

Cost of machine 469,000

 Date Description Post ref. Debit Credit Jun-30 Machine 469,000 Accounts payable 469,000 (For machine purchased)

Note:

Acquisition cost of a long term asset

It consists of all cost which have been incurred on assets to acquire it and bring into current location and ready to use situation.It includes of buying an asset, freight expense, transit insurance, interest cost (incurred while building an asset, installation cost, taxes, real estate agent fee or lawyer fees or test runs to make plant ready to practice.

2. Journal entry for depreciation in next year will be as follows:

Depreciation through Double Declining Method

Now depreciation through Double-Declining balance method would be calculated by applying a fixed rate to the carrying value (the declining balance) of machine purchased. Most common fixed rate is equal to twice the straight-line depreciation percentage.

In this case estimated useful life is 10 years so annual depreciation rate is 10 percent (100 percent / 10 years). Under double declining method fixed rate would be double of depreciation rate which is 20 percent. 20 percent rate will be applied to the carrying value of the machine to calculate depreciation each year.

Carrying value of machine is 469,000 so depreciation will be 20% of 469,000

 Date Description Post ref. Debit Credit Jun-30 Depreciation 93,800 Accumulated Dep- machine 93,800 (For depreciation charged for first year)
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