You are engaged in the examination of financial statements of the Dewoskin Company and are auditing the Machinery and Equipment account and the related depreciation accounts for the year ended December 31, 2007. Your permanent file contains the following schedules:

Here is a transcript of the Machinery and Equipment account for 2007:

Your examination reveals the following eight items:
1. The company uses a 10-year life for all machinery and equipment for depreciation purposes. Depreciation is computed by the straight-line method. Six months€™ depreciation is recorded in the year of acquisition or retirement. For 2007 the company recorded depreciation of $2,800 on machinery and equipment.
2. The Burnham grinder was purchased for cash from a firm in financial distress. The chief engineer and a used machinery dealer agreed that the machine, which was practically new, was worth $2,100 in the open market.
3. For production reasons, the new air compressor was installed in a small building that was erected in 2007 to house the machine. The building will also be used for general storage. The cost of the building, which has a 25-year life, was $2,000 and is included in the $4,500 voucher for the air compressor.
4. The power lawnmower was delivered to the home of the company president for personal use.
5. On June 1, the battery in a battery-powered lift truck was accidentally damaged beyond repair. The damaged battery was included at a price of $600 in the $4,200 cost of the lift truck purchased on July 1, 2004. The company decided to rent a replacement battery instead of buying a new battery. The $320 expenditure is the annual rental for the battery paid in advance, net of a $40 allowance for the scrap value of the damaged battery that was returned to the battery company.
6. The Rockwood saw sold on August 1 had been purchased on August 1, 1994, for $1,500. The saw was in use until it was sold.
7. On September 1, the company determined that a production casting machine was no longer needed and advertised it for sale for $1,800 after having determined from a used machinery dealer that this was its market value. The casting machine had been purchased for $5,000 on September 1, 2002.
8. On November 1 a baking oven was purchased for $10,000. A $2,800 down payment was made, and the balance will be paid in monthly installments over a three-year period. The December 1 payment includes interest charges of $36. Legal title to the oven will not pass to the company until the payments are completed.

Required
1. Prepare the auditor€™s adjusting journal entries required on December 31, 2007, for machinery and equipment and the related depreciation.
2. Prepare schedules for detailing the effect of additions and retirements on the assets and related accumulated depreciationbalances.

Transcribed Image Text:

2006 12/31/05 Retirements Addition 12/31/06 and Equipment 52,100 $ 8,000 2 5,300 $21,800 52,100 $25,400 2006 12/31/05 Retirements Addition 12/31/06 Accumulated Depreciation 52,100 0 $2,100 51825 Machinery and Equipment Ref Credit Balance forward Mar. 1 May 1 June 1 June 1 Power lawnmower Lift-truck battery $ 150 Nov. 1 Nov. 1 Dec. 1 Dec. 31 $39,406