On May 1, Chippewa Brewery, Ltd. purchased a bottling factory including land and equipment for $920,000. Chippewa paid legal fees of $20,000, renovation costs on the building of $38,000, and the $18,000 cost of overhauling the equipment. The appraisal value for the land was $300,000, for the building was $780,000, and for the equipment was $120,000.
Chippewa estimated that the building’s useful life was 20 years with a residual value of $16,000 and that the equipment would produce 2,000,000 bottles of beer, with a residual value of $2,000. Chippewa uses the straight-line method to depreciate buildings and the units-of-production method to depreciate equipment. Chippewa’s year-end is December 31. The equipment produced 350,000 bottles for the first year and 420,000 bottles for the second year.
1. Apportion the cost of the factory on the basis of the appraised value. Show your calculations.
2. Record the journal entry for the purchase of the factory, land, and machine.
3. Record the adjusting entry for the depreciation for the first year.
4. What would be the carrying value of the asset at the end of the first year and the second year?