2. Perth Construction Company

The Perth Construction Company purchased a piece of machinery on June 29, 1986 for $53,000. Freight costs came to $800. It cost $1,700 to install and test the machinery. At this time, it was estimated that the machine would be used for six years and would have a trade-in value of $8,000 at that time.

In March 1989, the owners realized that this machinery would last only five years.

On July 2, 1990, the machine broke down, and rather than repair it, the company decided to trade it in on a new machine. The new machine had a market value of $70,000 and a trade-in allowance of $15,000 was given on the old machine. The balance was paid in cash.

a) Prepare the journal entry to record the purchase of the machine on June 29, 1986.

b) Calculate the depreciation charges that would appear on the 1986 and 1987 Income Statements, using straight-line.

c) Show the journal entry for the 1986 depreciation.

d) Show how the machine would appear in the Perth Construction Company Balance Sheet on December 31, 1988, presuming the straight-line method of depreciation is used.

e) Briefly explain why no journal entry would be made to correct previous years records after the new expected life in March 1989. Give one GAAP to support your argument.

f) Prepare the journal entry for the July 2, 1990 transaction. Use $15000 as Fair Market Value