Adjusting Entries In your examination of the financial statements of Ericson Corporation at December 31, 2007 you observe the contents of certain accounts and other pertinent information as follows:
|
Building |
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|
Date |
Explanation |
Post REF |
Debit |
Credit |
Balance |
|
12/31/2006 |
Balance |
X |
$100,000 |
— |
$100,000 |
|
7/1/2007 |
New boiler |
CD |
16,480 |
$1,480 |
115,000 |
|
9/1/2008 |
Insurance recovery |
CR |
— |
2,000 |
113,000 |
|
Accumulated Depreciation—Building |
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|
Date |
Explanation |
LF |
Debit |
Credit |
Balance |
|
12/31/2006 |
Balance: 15 years @ 4% of $100,000 (no salvage value) |
X |
$60,000 |
$60,000 |
|
|
12/31/2007 |
Annual depreciation |
GJ |
4,440 |
64,440 |
|
You learn that on June 15 the company’s old high pressure boiler exploded and was partially damaged. Damage to the building was insignificant, but the boiler was replaced by a more efficient oil burning boiler. The company received $2,000 as an insurance adjustment under terms of its policy for damage to the boiler. The disbursement voucher charged to the Building account on July 1, 2007 is reproduced here:
To: Leetsdale Heating Company
|
Fair value—new oil burning boiler (including fuel oil tank and 1,000 gallons fuel oil) |
$16,000 |
|
Sales tax—3% of $16,000 |
480 |
|
Total |
$16,480 |
|
Less: Allowance (fair value) for old coal burning boiler in building—to be removed at the expense of the Leetsdale Heating Company |
1,480 |
|
Total price |
$15,000 |
In vouching the expenditure, you determine that the terms included a 2% cash discount that was properly computed and taken. Neither the sales tax nor the trade in allowance on the old boiler is subject to discount. Your audit discloses that a voucher for $1,000 was paid to Monaco Company on July 3, 2007 and charged to the Repair Expense account. The voucher is adequately supported and is marked “installation costs for new oil burning boiler.”
The company’s fuel oil supplier advises that fuel oil had a market price of 80 cents per gallon on July 1 and 85 cents per gallon on December 31. The fuel oil inventory at December 31 was 100 gallons. A review of subsidiary property records discloses that the replaced coal burning boiler was installed when the building was constructed and was recorded at a cost of $10,000. According to its manufacturers, the new boiler should be serviceable for the estimated useful life of the building. In computing depreciation for retirements, Ericson Corporation consistently treats a fraction of a month as a full month.
Required
Prepare the adjusting journal entries that you would suggest for entry on the books of the Ericson Corporation. The books have not been closed. Support your entries with computations in good form. Assume that the building has no salvage value.