Covey Company Purchased A Machine On January 2, 2008, By Pay

Covey Company Purchased A Machine On January 2 2008, By Pay

Analyze the purchase and depreciation of the machine by Covey Company as well as related financial calculations including depreciation methods, book value over time, and other financial ratios and transactions described in the provided scenario.

Paper For Above instruction

In this paper, we evaluate the accounting treatment and financial implications of asset purchase, depreciation methods, and related financial ratios for Covey Company, Moore Company, and Border Company, based on the provided scenarios. The analysis covers depreciation calculations, impact on financial statements, and understanding of key financial ratios and repayment structures.

Depreciation of Covey's Machine

Covey Company purchased a machine on January 2, 2008, for $350,000, with an estimated useful life of five years and residual value of $35,000. The company needs to determine depreciation expense using two different methods: straight-line and declining balance with 200% depreciation rate, and to analyze the book value after three years under each method, including the units of production approach based on 130,000 units produced in 2008.

1. Straight-Line Depreciation

Using straight-line depreciation, the annual expense is calculated as:

\[ \text{Depreciation Expense} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} = \frac{\$350,000 - \$35,000}{5} = \$63,000 \text{ per year} \]

\n\nThe accumulated depreciation after three years would be:

\[ 3 \times \$63,000 = \$189,000 \]

Thus, the book value after three years is:

\[ \text{Book Value} = \text{Cost} - \text{Accumulated Depreciation} = \$350,000 - \$189,000 = \$161,000 \]

2. Declining Balance Method (200%)

Under the declining balance method with a 200% rate, depreciation is computed as a fixed percentage of the book value each year. The rate is:

\[ \text{Straight-line Rate} = \frac{1}{5} = 20\% \]

\[ \text{Declining Balance Rate} = 200\% \times 20\% = 40\% \]

Year 1 depreciation:

\[ \$350,000 \times 40\% = \$140,000 \]

Year 2 depreciation:

\[ (\$350,000 - \$140,000) \times 40\% = \$84,000 \]

Year 3 depreciation:

\[ (\$350,000 - \$140,000 - \$84,000) \times 40\% = \$50,400 \]

Book value after three years:

\[ \$350,000 - (\$140,000 + \$84,000 + \$50,400) = \$75,600 \]

3. Units of Production Method

The depreciation per unit is calculated as:

\[ \text{Depreciation per unit} = \frac{\text{Cost} - \text{Residual Value}}{\text{Total estimated units}} = \frac{\$350,000 - \$35,000}{600,000} = \$0.525 \text{ per unit} \]

For 130,000 units produced in 2008, depreciation expense:

\[ 130,000 \times \$0.525 = \$68,250 \]

Financial Ratios and Book Value Calculations for Moore Company

Moore Company's balance sheet includes accounts payable, receivable, bonds payable, cash, equipment, land, notes payable, and salaries payable. Using these figures, we analyze liquidity and payment process.

1. Current Ratio Calculation

The current ratio is:

\[ \text{Current Assets} = \text{Accounts receivable} + \text{Cash} = \$1,600 + \$4,000 = \$5,600 \]

\[ \text{Current Liabilities} = \text{Accounts payable} + \text{Salaries payable} = \$1,800 + \$800 = \$2,600 \]

\[ \text{Current Ratio} = \frac{\$5,600}{\$2,600} \approx 2.15 \]

2. Working Capital

Working capital:

\[ \text{Current Assets} - \text{Current Liabilities} = \$5,600 - \$2,600 = \$3,000 \]

3. Adjustment After Payment of Accounts Payable

Using cash to pay accounts payable reduces cash:

\[ \text{New cash} = \$4,000 - \$1,800 = \$2,200 \]

New current assets:

\[ \$1,600 + \$2,200 = \$3,800 \]

New current ratio:

\[ \frac{\$3,800}{\$800 + \$2,600} = \frac{\$3,800}{\$3,400} \approx 1.12 \]

New working capital:

\[ \$3,800 - \$3,400 = \$400 \]

4. Payable Turnover Ratio

Payable turnover ratio:

\[ \text{Cost of Goods Sold} / \text{Average Accounts Payable} = \$3,200 / \left(\frac{\$1,800 + \$1,800}{2}\right) = \$3,200 / \$1,800 = 1.78 \]

Rounded to one decimal: 1.8

Depreciation and Financing Analysis of Border Company's Truck

Border Company bought a truck for $18,000 with a note payable and agreed to four annual payments. Each payment includes principal and interest at 10% per annum, with equal annual installments.

1. Calculation of Each Payment

The annual payment can be found using the amortization formula for an installment loan:

\[ P = \frac{r \times PV}{1 - (1 + r)^{-n}} \]

where:

- \( PV = \$18,000 \),

- \( r = 10\% = 0.10 \),

- \( n = 4 \).

Calculating:

\[ P = \frac{0.10 \times 18000}{1 - (1.10)^{-4}} \approx \$5,005 \]

Rounded to nearest dollar: \$5,005 per year.

2. Entry for Purchase

Debit Equipment \$18,000, credit Notes Payable \$18,000.

3. Entry for First Payment

Interest for first year:

\[ \$18,000 \times 0.10 = \$1,800 \]

Principal repayment:

\[ \$5,005 - \$1,800 = \$3,205 \]

Entry:

Debit Notes Payable \$3,205, debit Interest Expense \$1,800, credit Cash \$5,005.

4. Interest Comparison Between First and Second Payments

The interest paid in the first year (\$1,800) will be more than in the second year because as the principal decreases, the interest calculated on the remaining balance diminishes, leading to lower interest payments in subsequent years.

Conclusion

This comprehensive analysis illustrates key accounting and financial principles including depreciation methods, impact on financial statements, and loan amortization in practical scenarios. Understanding these calculations assists in effective financial management and reporting for companies.

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