Question 7 On January 1, 2003, Mira Ltd

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Question 7

On January 1, 2003, Mira Ltd. acquired equipment for $800,000 in cash to manufacture coffee makers.

The equipment was expected to have a life of 5 years and produce 600,000 units over the 5 years. The

equipment was expected to have a salvage value of $50,000. In 2003, Mira produced 100,000 units and

sold 90,000 units.

Required

1

a.

Prepare the journal entry to record the acquisition of the equipment on January 1, 2003.

3

b.

Prepare the journal entry to record the amortization expense for the year 2003 using the

units-of-production method.

2

c.

Show, in good form, how the equipment will be presented on the balance sheet at December 31, 2003.

3

d.

Assume that Mira used the straight-line method of amortization instead of the units-of-production

method of amortization. What will be the effect of this change on net income?

2

e.

Mira provides a warranty on the coffee makers. Based on its experience, Mira expects to incur a

warranty cost of 2% of the selling price. The coffee makers were sold at a price of $20 per unit.

Prepare the year-end adjusting journal entry to record the estimated warranty liability.