Charlotte Motorcycle Repair Corporation Purchased A Machine

Charlotte Motorcycle Repair Corporation Purchased A Machine On January

Charlotte Motorcycle Repair Corporation purchased a machine on January 1, 2010, for $8,000 cash. The firm expects to use the machine for four years and believes it will be worthless at the end of this period. The company will depreciate the machine in equal annual amounts.

Paper For Above instruction

This paper meticulously examines the accounting implications of Charlotte Motorcycle Repair Corporation's purchase and depreciation of a machine, focusing on the initial acquisition, subsequent asset valuations, depreciation expenses, and the overall impact on financial statements over the asset’s useful life.

Introduction

The purchase of fixed assets plays a critical role in a company’s operational capacity and financial health. Proper recording, depreciation, and reflection of these assets ensure accurate financial reporting and compliance with accounting standards. This study explores the lifecycle of a machine bought by Charlotte Motorcycle Repair Corporation, emphasizing the accounting treatments from purchase through its depreciation over four years.

Initial Purchase and Impact on the Accounting Equation

On January 1, 2010, Charlotte Motorcycle Repair Corporation acquired a machine for $8,000 in cash. This transaction significantly affects the accounting equation, which is Assets = Liabilities + Equity. The purchase increases the assets, specifically machinery, and decreases the cash asset by the same amount. Accordingly, the journal entry would include a debit to the Machine asset account and a credit to Cash:

  • Debit: Machinery $8,000
  • Credit: Cash $8,000

In the accounting equation perspective, this results in an increase in assets and a decrease in cash, with no immediate impact on liabilities or equity.

Depreciation Calculation and Journal Entries

The firm expects to utilize the machine for four years with a residual value of zero at the end of this period. Given the straight-line depreciation method, the annual depreciation expense is calculated as:

Depreciation expense = Cost of the machine / Useful life

Depreciation expense = $8,000 / 4 = $2,000 per year.

For each year, the journal entry to record depreciation involves a debit to Depreciation Expense and a credit to Accumulated Depreciation:

  • Debit: Depreciation Expense $2,000
  • Credit: Accumulated Depreciation - Machinery $2,000

Accounting Equation After First Year

At the end of 2010, the book value of the machinery is:

Original cost: $8,000

Less accumulated depreciation: $2,000

Net book value: $6,000

In the assets section of the balance sheet as of December 31, 2010, the machinery is reported at its net book value ($6,000) under property, plant, and equipment. The accumulated depreciation of $2,000 is deducted from the original cost. Similar accounting procedures apply at December 31, 2011, where accumulated depreciation totals $4,000, and the net book value is $4,000.

Depreciation Expense in Income Statement

For the year ending December 31, 2010, the depreciation expense recognized is $2,000, representing the allocation of the machine’s cost over its useful life. Similarly, the depreciation expense for 2011 remains consistent at $2,000, as per the straight-line method. These expenses are recorded in the income statement, reducing net income for each respective year.

Total Depreciation and Asset Book Value at End of Useful Life

The total depreciation expense over the four-year period is:

Depreciation per year x Number of years = $2,000 x 4 = $8,000

By the end of four years, the accumulated depreciation equals the original cost of the machine, effectively reducing its book value to zero. This aligns with the assumption that the machine will be worthless after four years. The book value at the end of the useful life corresponds to the initial cost minus total depreciation, which in this case is zero, confirming the asset's fully depreciated state.

Conclusion

The accounting handling of Charlotte Motorcycle Repair Corporation’s machine purchase illustrates standard procedures for asset recognition, depreciation, and reporting. Accurate depreciation calculations ensure financial statements fairly present the economic reality of the company's assets. The straight-line method simplifies the depreciation process and provides consistent expense recognition over the asset's useful life, culminating in zero book value by the end of four years, in accordance with the company's expectations.

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