Question: A. Long-Term Asset Acquisition Roxy and Harley (R & H) is considering a significant equipment replacement. R & H would like to replace some of their equipment before December 31, 2017. The equipment originally cost $840,000 and the equipment's accumulated depreciation balance at the end of 2016 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 four equipment options as follows:
The estimated life of any new equipment is 7 years. R & H would like you to analyze the four options to determine the financial impact of each decision and any non-financial considerations that may result from each decision. Additional information about each option 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 equipment's original useful life was eight years, starting January 1, 2008.) The costs will be financed at the end of 2017 through a one-year loan for at 10%.
(a) Prepare journal entries in general journal form for each of the four options. (b) Write a brief memo on how each option affects the financial statements. Include your journal entry(ies) in the body of your memo for each option. Discuss the strengths and weaknesses of each option.