The Gysbers Company Limited has embarked on a two- year pollution- control program that will require the purchase of two smokestack scrubbers costing a total of $ 600,000. One scrubber will be bought in 20X5 and one in 20X6. These scrubbers qualify for an investment tax credit of 20%. In addition, the federal government will lend Gysbers $ 100,000 for each scrubber installed. Provided that emissions are reduced 95% by the end of 20X8, the loans will be forgiven. The federal funds are received as the expenditures are made. If the emission standards are not met, the loan will have to be repaid. In 20X5, it was impossible to predict the success that the company would have with the scrubbers. Gysbers will depreciate the devices over 20 years, straight- line ( no residual value), and will take a full year’s depreciation in the year installed. The purchase and installation schedule is as follows:

Required:
1. Prepare journal entries to record the purchase of Scrubber 1 and Scrubber 2, and the receipt of the federal loans.
2. Prepare journal entries to record depreciation and amortization for the year ending 31 December 20X6.
3. Assume that after testing in early 20X9, it is found that the emissions have been reduced only 85%. After negotiations, it was agreed that 45% of the loans will be repaid to the government in February 20X9. The balance of the loan will be forgiven. Prepare the journal entries to record the repayment and reclassification in20X9.

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Cost $300,000 300,000 $600,000 January 20X5 January 20X6 Scrubber 1 Scrubber 2 Total