# Big Sky Inc. recorded the following transactions over the life of a piece of equipment purchased in

## Question:

Big Sky Inc. recorded the following transactions over the life of a piece of equipment purchased in 2011:

Jan. 1, 2011 Purchased the equipment for $36,000 cash. The equipment is estimated to have a five-year life and$6,000 salvage value and was to be depreciated using the straight-line method.

Dec. 31, 2011 Recorded depreciation expense for 2011.

May 5, 2012 Undertook routine repairs costing $750. Dec. 31, 2012 Recorded depreciation expense for 2012. Jan. 1, 2013 Made an adjustment costing$3,000 to the equipment. It improved the quality of the output but did not affect the life estimate.

Dec. 31, 2013 Recorded depreciation expense for 2013.

Mar. 1, 2014 Incurred $320 cost to oil and clean the equipment. Dec. 31, 2014 Recorded depreciation expense for 2014. Jan. 1, 2015 Had the equipment completely overhauled at a cost of$7,500. The overhaul was estimated to extend the total life to seven years and revised the salvage value to $4,000. Dec. 31, 2015 Recorded depreciation expense for 2015. July 1, 2016 Sold the equipment for$9,000 cash.

Required

a. Use a horizontal statements model like the following one to show the effects of these transactions on the elements of the financial statements. Use + for increase â€“ for decrease, and NA for not affected. The first event is recorded as an example.

b. Determine the amount of depreciation expense Big Sky will report on the income statements for the years 2011 through 2015.
c. Determine the book value (cost 2 accumulated depreciation) Big Sky will report on the balance sheets at the end of the years 2011 through 2015.
d. Determine the amount of the gain or loss Big Sky will report on the disposal of the equipment on July 1,2016.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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