Siniaro - Long-Term Asset Acquisition

Emmett & Gracie (E & G) is considering a significant equipment replacement. E & G would like to replace some of their equipment before December 31, 2016. The equipment originally cost $840,000 and the equipments accumulated depreciation balance at the end of 2015 is will be $790,000. At this point the equipment is depreciated to its salvage value.Your long-term asset accountant, Joe, tells you about this equipment option 4 as follows:

4. overhaul the old equipment.

The estimated life of any new equipment is 7 years.

E & G would like you to analyze option 2 to determine the financial impact of this decision and any non-financial considerations that may result from this decision. Additional information about option 4 is presented below:

Option 4: Overhaul the existing equipment. The following expenses are anticipated under this approach: (1) The normal annual cost for lubrication and replacement of minor parts to maintain the integrity of the exterior body would be $55,000. (2) The cost of re-wiring interior components in an overhaul would be $250,000. (3) Replacing old worn components would cost $148,000 with associated labor costs of $310,000 for installation. The overhaul is estimated to extend the useful life of the equipment another four years. (The present equipments original useful life was eight years, starting January 1, 2007.) The costs will be financed at the end of 2016 through a one-year loan for at 10%.

Instructions: (A) Prepare jounral entries in general journal form for option 4 and (B) explain on how option 4 affects the finacial statments and the strengths and weaknesses of this option.