Question No: 1

Journal Entries in the books of Company X

At the time when the asset is purchased by the company

Date Account title and explanation Debit Credit

Equipment $5,000,000
To Cash $1,750,000
To Notes Payable $3,250,000
( To record the Equipment purchased)

Explanation –

Equipment – Debited – Based on Real account concept, what comes in to the business to be
debited. Hence, Equipment is coming into the business it’s being debited. Equipment account
has to be debited with the amount with which it is purchased i.e., cash and credit.
Cash – Credited – Based on Real account concept, what goes out of the business to be
credited. Hence, cash is going out of the business the same is credited. Actual cash that is
paid towards purchase of equipment to be credited.
Notes Payable – Based on Personal account concept, what business owes (to be paid) to be
credited. Hence, Notes payable is credited. Here, we made only a part payment for the
equipment and the balance amount is yet to be paid and the business owes the liability hence,
the same is credited.

Depreciation under straight line method:-

Depreciation is a non-cash expense. It is a charge to Profit and loss account and at the end of
every year, Equipment to be carried at Purchase value less Depreciation in Balance Sheet.
Depreciation is charged on Equipment, Furniture, Plant and Machinery. Reason behind
charging depreciation to the assets is that the value of the assets will reduce over a period of
time because of regular wear and tear (usage), changes in technology etc.

One of the method for computing the depreciation of the asset is straight line method.

Formula for computing Depreciation under Straight line method

Total value of the asset - Residual Value

Depreciation =
Useful life of Asset

In the given question, Depreciation rate is 15% per annum

Depreciation is calculated as below-
Depreciation = Value of Equipment*Depreciation rate
= $5,000,000*15%
= $750,000

Hence, Depreciation of $7,50,000 to be charged every year till the useful life of the asset.
Journal Entry

Date Account title and explanation Debit Credit

Depreciation $750,000
To Equipment $750,000
( To record the Depreciation on Equipment)

Explanation-

Depreciation – Debited – Based on Nominal account concept, all expenses and losses to be
debited. Depreciation, being an expense to the entity the same is being debited.
Equipment – Credited – Depreciation is charged on the equipment because of its regular
usage in the business. The value of equipment was reduced over a period of time, it was
credited.

Repayment of Loan along with Interest:-

Loan Amount = $5,00,000

Interest Rate = 1% per month
Number of years = 2 years i.e., 24 months

Interest on Loan is calculated as below-

Interest on Loan = Loan amount*Interest rate*No. of months
= $5,00,000*1%*24
= $1,20,000

Journal entry –

Date Account title and explanation Debit Credit

Loan $500,000
Interest on Loan $120,000
To Bank $620,000
( To record the repayment of Loan along
with interest)

Explanation:-

Loan – Debited – Here, we are repaying the loan to the bank and thus our liability towards
the bank is reduced.
Interest – Debited – We are making interest payment along with loan repayment hence, the
same is accounted now while paying. Interest being the expense to the company the same is
debited based on Nominal account concept.
Bank – Credited – Based on Real account concept, what goes out of the business to be
credited. The loan amount along with interest is paid to the bank on maturity of the loan.
Thus, the total amount is credited.