Response to the following problem:
Part A:
Davies Fabricating Inc. started business on May 1, 2016. The year-end of the company is December 31. On May 5, 2016, the company purchased equipment for $130,000 cash. The equipment had an estimated useful life of four years, an estimated total production output of 100,000 units, and a residual value of $10,000. The equipment was depreciated using the units-of-production (usage) method. Actual units of output over three years were: 2016- 12,000; 2017-30,000; and 2018-20,000.
On January 1, 2019, the company traded in the original equipment for new equipment. The company paid and additional $140,000 cash for the new equipment. The company had used the units-of-output (usage) method to calculate depreciation on the old manufacturing equipment. The fair value of the original equipment was $60,000 at the date of the trade.
Required: Prepare journal entries to record the transactions on the following dates:
1. May 1, 2016
2. January 1, 2019
Part B:
On January 1, 2017, Davies Fabricating Inc. was able to buy a nearby warehouse for the storage of its finished product. The cost included land, $50,000 and building, $300,000. The company signed a ten-year bank loan for $320,000 and paid the balance in cash. The building had an estimated useful life of fifty years with no residual value. On June 28, 2021, the warehouse was totally destroyed by fire. On July 31, the company was notified that it would receive $270,000 from the insurance company as settlement in full for the building at a later date. The building was depreciated on the straight-line basis. Assume the company uses the ½ year rule to calculate depreciation expense in the year of acquisition and disposal.
Required: Prepare journal entries to record the transactions on the following dates:
1. January 1, 2017
2. June 28, 2021.