In January 2012, Klemtu Inc. (Klemtu) purchased a new piece of equipment that was expected to increase the efficiency of the company's production process and the quality of its output. The equipment cost $150,000. The equipment was estimated to have a six-year useful life and a residual value of $15,000. In February 2016, Klemtu paid $98,000 to overhaul the equipment. The overhaul upgraded the technology of the equipment and extended its useful life by an additional two years. In May 2016, the equipment broke down and required servicing to get it to operate properly. The servicing cost $10,000. Klemtu's year-end is December 31. The estimated residual value remained $15,000 throughout the period.

a. Provide the journal entry to record the purchase of the equipment in March 2012.
b. How would you account for the overhaul done in February 2016? Explain your reasoning.
c. How would you account for the servicing done in May 2016? Explain.
d. What effect would the events in (b) and (c) have on Klemtu's depreciation expense?
e. What would be the depreciation expense in each year of the equipment's life, assuming that Klemtu uses straight-line depreciation?

  • CreatedFebruary 26, 2015
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