On July 1, 2009, the Fitzgerald Corp. bought a machine for use in operations. The machine has an estimated useful life of six years and an estimated residual value of \(\$ 2,500\). The company provided the following information:

a. Invoice price of the machine, \(\$ 60,000\).

b. Freight paid by the vendor per sales agreement, \(\$ 650\).

c. Installation costs, \(\$ 2,500\) cash.

d. Payment of the machine's price was made as follows:

July 1 :

- Fitzgerald Corp. issued 2,000 common shares at \(\$ 5\) per share.

- Signed an interest-bearing note for the balance of the invoice price, payable on September 1, 2009 , plus 9 percent interest.

October 1: Paid the note payable and related interest in cash.

e. On June 30, 2012, the company completed the replacement of a major part of the machine that cost \(\$ 11,500\). This expenditure is expected to reduce the machine's operating costs and increase its estimated useful life by two years. At the same time, the machine's estimated residual value was reduced to \(\$ 2,000\).

f. Assume that on July 1,2016 , the company decided to dispose of the machine by selling it to Ayad Inc. on that date for \(\$ 16,000\) cash.

Required:

1. Compute the acquisition cost of the machine, and explain the basis for including certain costs in the determination of the machine's acquisition cost.

2. Indicate the accounts affected and the amounts and direction (+ for increase and - for decrease) of the effects of the purchase and subsequent cash payment on the accounting equation. Use the following headings:

3. Prepare the journal entries to record the purchase of the machine and subsequent cash payments on October \(1,2009\).
4. Compute the depreciation expense for each of the years 2009 and 2012, assuming the company's fiscal year ends on December 31."Use the straight-line depreciation method.
5. Prepare the journal entry to record the sale of the machine on July 1, 2016. (Hint: First determine the balance of the account Accumulated Depreciation on that date.)

Transcribed Image Text:

Date Assets = Liabilities + Shareholders' Equity