Fixed assets: answer key
Answer key: the accepted entries with the amounts of the worksheet, and why.
Convention: United States (US textbooks)
Buying equipment for cash
A company buys a production machine for $18,000.00 and pays the full price by check on delivery.
Assumptions: No sales tax applies to this purchase.
Account Debit Credit Equipment $18,000.00 Cash $18,000.00 Why
The machine is a long-lived asset, so it is recorded in Equipment at its cost ($18,000.00), not as an expense. Paying by check reduces Cash by the same amount.
Buying a computer server on account
A company buys a computer server for its office on account for $4,800.00. The supplier’s invoice is payable in 60 days.
Assumptions: No sales tax applies to this purchase. The company records computers in its Equipment account.
Account Debit Credit Equipment $4,800.00 Accounts Payable $4,800.00 Why
The server is a long-lived asset, so Equipment is debited for its cost ($4,800.00). Nothing is paid yet: the company owes the supplier in Accounts Payable.
Buying equipment with a down payment and a note payable
A company buys a machine for $24,000.00. On delivery it pays $6,000.00 by check as a down payment and signs a 6-month, 6% note payable to the supplier for the balance.
Assumptions: No sales tax applies to this purchase. Interest on the note is recorded as it accrues, not at purchase.
Account Debit Credit Equipment $24,000.00 Cash $6,000.00 Notes Payable $18,000.00 Why
Equipment is recorded at its full cost ($24,000.00), whatever the means of payment. Cash falls by the down payment ($6,000.00); the balance ($18,000.00) is a written promise to pay, so it goes to Notes Payable, not Accounts Payable. No interest has accrued yet on the day of purchase.
Buying equipment including freight and installation
A company buys a machine for $20,000.00. A carrier charges $600.00 to bring it to the factory, and a technician charges $900.00 to install and test it. All three amounts are paid by check the day the machine is ready for use.
Assumptions: No sales tax applies to these amounts.
Account Debit Credit Equipment $21,500.00 Cash $21,500.00 Why
The cost of equipment includes every cost needed to get it ready for use: the price, freight and installation, $21,500.00 in total, all debited to Equipment. None of them is an expense of the period; the machine is depreciated later. Cash falls by the same amount.
Buying equipment with sales tax, part paid and part on account
A company buys a machine for $10,000.00 plus 6% sales tax. It pays $4,000.00 by check; the rest is owed to the supplier on account, due in three months.
Assumptions: Sales tax 6%.
Account Debit Credit Equipment $10,600.00 Cash $4,000.00 Accounts Payable $6,600.00 Why
Sales tax paid on equipment is part of its cost, so Equipment is debited for $10,600.00. Cash falls by $4,000.00 and the remaining $6,600.00 is owed to the supplier.
Buying a plot of land
A company buys a plot of undeveloped land next to its warehouse, to use as a storage yard. It pays the price of $80,000.00 and closing costs of $1,600.00 (title insurance and recording fees) by check.
Assumptions: The seller pays the real estate commission.
Account Debit Credit Land $81,600.00 Cash $81,600.00 Why
Land is recorded at everything paid to acquire it: the price plus closing costs, $81,600.00 in total. Land is not depreciated, and the closing costs are not an expense: they are part of its cost.
Buying a building with a mortgage loan and a bank transfer
A company buys a warehouse for $400,000.00; an appraisal assigns $100,000.00 of the price to the land it stands on. A bank grants a 20-year mortgage loan of $280,000.00, repayable in monthly installments, and pays it directly to the seller. The company pays the rest by check.
Assumptions: Closing costs and loan fees are ignored. The whole mortgage is recorded in one account; its current portion is shown separately only on the balance sheet.
Account Debit Credit Land $100,000.00 Buildings $300,000.00 Cash $120,000.00 Mortgage Payable $280,000.00 Why
Land and building are recorded separately because only the building is depreciated: Land $100,000.00, Buildings $300,000.00. The mortgage ($280,000.00) is a long-term liability, Mortgage Payable, and Cash pays the rest ($120,000.00). No interest has accrued on the day of purchase.
Buying a delivery van with a bank loan
A company buys a delivery van for $32,000.00. It signs a three-year note payable with its bank for $25,000.00, with the whole principal due at maturity; the bank pays the loan directly to the dealer. The company pays the rest by check.
Assumptions: Sales tax and registration fees are ignored. Interest is paid monthly and recorded when due, not at purchase.
Account Debit Credit Vehicles $32,000.00 Cash $7,000.00 Notes Payable $25,000.00 Why
The van goes to Vehicles at its cost ($32,000.00). The bank loan is a written promise to repay, recorded in Notes Payable ($25,000.00); Cash pays the rest ($7,000.00). A loan received and paid straight to the dealer has the same effect as receiving it into Cash and then paying.
Annual straight-line depreciation of a delivery van
On January 1 two years ago, a company bought a delivery van for $25,500.00. Its useful life is 5 years and its salvage value is $3,000.00. Record this year's depreciation on December 31.
Assumptions: Depreciation is accumulated in Accumulated Depreciation. Straight-line depreciation: the cost minus the salvage value is spread evenly over the useful life.
Account Debit Credit Depreciation Expense $4,500.00 Accumulated Depreciation—Vehicles $4,500.00 Why
Straight-line depreciation is (cost − salvage value) / useful life = ($25,500.00 − $3,000.00) / 5 = $4,500.00, the same amount every year. Debit Depreciation Expense and credit Accumulated Depreciation—Vehicles; the van stays at cost in Vehicles.
Depreciation of a building for part of its first year
This year a company bought an office building. Its cost, without the land, is $240,000.00. It was placed in service on the first day of a month, and by December 31, the year end, it has been used for 9 months. Useful life 25 years, no salvage value. Record this year's depreciation.
Assumptions: Depreciation is accumulated in Accumulated Depreciation. Straight-line depreciation, counted in whole months from the month the building was placed in service.
Account Debit Credit Depreciation Expense $7,200.00 Accumulated Depreciation—Buildings $7,200.00 Why
A full year's depreciation is $240,000.00 / 25 = $9,600.00. The building was used for 9 months, so this year's charge is $9,600.00 × 9 / 12 = $7,200.00. Debit Depreciation Expense and credit Accumulated Depreciation—Buildings; the land is never depreciated.
Declining-balance depreciation, first year
On January 1 a company bought a new machine for $30,000.00 and placed it in service the same day. Its useful life is 5 years, with no salvage value. Record the first year's depreciation on December 31.
Assumptions: Depreciation is accumulated in Accumulated Depreciation. Double-declining-balance method: twice the straight-line rate, applied to the book value at the start of each year. A full year of depreciation.
Account Debit Credit Depreciation Expense $12,000.00 Accumulated Depreciation—Equipment $12,000.00 Why
The straight-line rate is 1/5 a year; the double-declining rate is twice that, applied to the book value, which in the first year is the full cost: $30,000.00 × 2 / 5 = $12,000.00. Debit Depreciation Expense and credit Accumulated Depreciation—Equipment.
Depreciating several assets in one entry
On December 31 a company records the year's depreciation on three assets in one entry: an office building (cost without the land $240,000.00, useful life 40 years), a machine (cost $24,000.00, 8 years) and a delivery van (cost $20,000.00, 5 years). None has a salvage value.
Assumptions: Depreciation is accumulated in Accumulated Depreciation. Straight-line depreciation; the company owned all three assets for the whole year. Each asset class has its own accumulated depreciation account.
Account Debit Credit Depreciation Expense $13,000.00 Accumulated Depreciation—Buildings $6,000.00 Accumulated Depreciation—Equipment $3,000.00 Accumulated Depreciation—Vehicles $4,000.00 Why
Building $240,000.00 / 40 = $6,000.00; machine $24,000.00 / 8 = $3,000.00; van $20,000.00 / 5 = $4,000.00. Depreciation Expense is debited with the total, $13,000.00, and each asset's accumulated depreciation account is credited with its own share.
Selling a machine on account at a gain
A company sells a used machine on account for $9,000.00; the buyer will pay in 30 days. The machine cost $18,000.00 and its accumulated depreciation is $12,000.00.
Assumptions: Depreciation is accumulated in Accumulated Depreciation. Depreciation has been recorded up to the date of sale. Sales tax is ignored in this item.
Account Debit Credit Accounts Receivable $9,000.00 Accumulated Depreciation—Equipment $12,000.00 Equipment $18,000.00 Gain on Disposal of Equipment $3,000.00 Why
The buyer owes $9,000.00, so Accounts Receivable is debited. The machine leaves Equipment at its cost and its accumulated depreciation ($12,000.00) is removed; its book value is $6,000.00, so the gain is $9,000.00 − $6,000.00 = $3,000.00.
Selling a machine at a loss
A company sells a used machine for $3,000.00 cash. The machine cost $12,000.00 and its accumulated depreciation is $7,000.00.
Assumptions: Depreciation is accumulated in Accumulated Depreciation. Depreciation has been recorded up to the date of sale. Sales tax is ignored in this item.
Account Debit Credit Cash $3,000.00 Accumulated Depreciation—Equipment $7,000.00 Loss on Disposal of Equipment $2,000.00 Equipment $12,000.00 Why
The machine and its accumulated depreciation both leave the books. Its book value is $5,000.00 and the price is $3,000.00, so the loss is $2,000.00.
Scrapping a fully depreciated machine
A machine that cost $8,500.00 is fully depreciated; it had no salvage value. It no longer works, so today the company scraps it: it is hauled away free of charge and nothing is received for it.
Assumptions: Depreciation is accumulated in Accumulated Depreciation. No disposal costs and no proceeds.
Account Debit Credit Accumulated Depreciation—Equipment $8,500.00 Equipment $8,500.00 Why
The book value is $8,500.00 − $8,500.00 = 0 and nothing is received, so there is no gain or loss. Debit Accumulated Depreciation—Equipment and credit Equipment by $8,500.00 to remove both from the books.
Trading in an old delivery van for a new one
A company trades in its old delivery van for a new one with a price of $39,000.00. The dealer gives a trade-in allowance of $10,500.00 for the old van, and the company pays the rest in cash. The old van cost $28,000.00 and its accumulated depreciation is $20,000.00.
Assumptions: Depreciation is accumulated in Accumulated Depreciation. The trade-in allowance equals the old van's fair value and the exchange has commercial substance, so the new van is recorded at the cash paid plus that fair value and the gain on the old van is recognized. Depreciation has been recorded up to the date of the trade-in. Sales tax is ignored in this item.
Account Debit Credit Vehicles $11,000.00 Accumulated Depreciation—Vehicles $20,000.00 Cash $28,500.00 Gain on Disposal of Vehicles $2,500.00 Why
The old van is treated as sold for its fair value ($10,500.00); its book value is $8,000.00, so the gain is $2,500.00. Vehicles is debited $39,000.00 for the new van and credited $28,000.00 for the old one, a net debit of $11,000.00; the old van's accumulated depreciation ($20,000.00) is removed, and Cash is credited with the $28,500.00 paid.
Paying for an ordinary repair
A production machine breaks down. A technician replaces a worn drive belt and adjusts the machine, and the company pays the bill of $480.00 in cash the same day.
Assumptions: The repair only restores the machine to its normal working condition: it does not increase its capacity or extend its useful life. No sales tax applies.
Account Debit Credit Repairs Expense $480.00 Cash $480.00 Why
An ordinary repair keeps the machine working as before, so it is an expense of the period (Repairs Expense), not a cost added to Equipment or charged to Accumulated Depreciation. Cash falls by $480.00.
Adding a refrigeration unit to a van, on account
A company has a refrigeration unit fitted to its delivery van so that the van can carry chilled goods. The supplier’s bill is $8,500.00, payable in 60 days.
Assumptions: The unit stays on the van for the rest of its life and adds a capability the van did not have; no existing part is replaced. No sales tax applies.
Account Debit Credit Vehicles $8,500.00 Accounts Payable $8,500.00 Why
An addition that gives the van a new capability is a capital expenditure: its cost ($8,500.00) is added to Vehicles and depreciated with it, not charged to Repairs Expense. Nothing is paid yet, so the supplier is owed in Accounts Payable.
Owner contributes a private machine to the business during the year
In the middle of the year, the owner of a sole proprietorship transfers to the business a machine that she has owned privately for five years. An independent appraisal values it at $9,500.00 today. The business will use the machine in its workshop.
Assumptions: The machine is recorded at its fair value (the appraised value) on the day of the transfer. No sales tax applies.
Account Debit Credit Equipment $9,500.00 Owner’s Capital $9,500.00 Why
An owner’s investment of an asset increases the owner’s equity, so Owner’s Capital is credited and Equipment debited at the asset’s fair value ($9,500.00), not at what the owner once paid. Owner’s Drawings is only for amounts taken out of the business.
Not in this convention: Selling a machine at a gain, with VAT
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