Questions -
Q1. On January 3, 2014, Tom's Excavating Company purchased a bulldozer for $120,000. In addition to the basic purchase price, the company paid sales tax of $4,000 and freight charges of $7,000. The bulldozer will be used for 36,000 machine hours. Tom estimates that the bulldozer will have a useful life of 5 years and no residual value.
Required:
I. Compute the cost of the asset.
II. Compute the depreciation expense for 2014 and 2015 using the
i. straight-line method;
ii. units-of production method assuming the bulldozer was used 5,000 machine hours in 2014 and 20,000 machine hours in 2015; and
iii. double declining balance method.
Q2. In the most recent year of operations, Bertha's Games sold merchandise costing $92,000 for $182,000. All merchandise was sold under a 1-year warranty. At the time of sale, Bertha estimated that warranty claims would amount to 6% of sales. During the year, she replaced defective merchandise for $4,500. All transactions were cash transactions.
i. Prepare journal entries to record all transactions related to the warranty.
ii. Based solely on the above information, determine Bertha's Games operating income for the year.