Effects of depreciation on manufacturing equipment

Discussion in 'Exams and Studying' started by Ducol, Nov 9, 2016.

  1. Ducol

    Ducol

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    Hello!

    For a few days I can't solve the problem that looks easy-peasy. I will be grateful for help on this one.

    Problem: which items will be increased by depreciation entry, when a company has recorded X$ of depreciation on manufacturing equipment used to produce goods:
    - accumulated depreciation
    - work in process inventory
    - current assets
    - cost of goods sold
    - pp&e

    I have marked work in process inventory and accumulated depreciation first; that was wrong; after pondering for a while I have added cogs, but that's also wrong. Please, take a look at my reasoning.

    The journal entry is:

    Dr Work in process inventory (+A) X
    Cr. Accumulated Depreciation (+XA) X

    1) accumulated depreciation: yes, this account is increased when we record depreciation on manufacturing equipment, as well as a depreciation expense on pp&e; so my answer solid yes here;

    2) work in process inventory: solid yes, as the I show in the journal entry; this is the equipment used to produce goods, so it is part of the cost;

    3) current assets: no, because although we increase assets by debiting work in process, we immediately increase counter asset account, i.e. accumulated depreciation; so current assets do not increase;

    4) cost of goods sold: well, I have not marked this one initially, because nothing's said about selling the goods; the company has merely recorded depreciation; but later I thought that maybe the problem implies that whenever the company plans to sell these goods, their cost will be higher, and marked cogs as yes.

    5) pp&e: no, this account can't increase.

    Please, help me to understand my mistake. Thank you very much!
     
    Ducol, Nov 9, 2016
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  2. Ducol

    Ducol

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    I have solved it. Work in process inventory, accumulated depreciation and current assets are increased by recording depreciation. Current assets increase due to sort of doubling of the equipment cost, which is recorded in PP&E account.
     
    Ducol, Nov 9, 2016
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