Hulme Company operates a small manufacturing facility as a supplement to its regular service activities. At the beginning of the current year, an asset account for the company showed the following balances:

Manufacturing equipment	$ 124,200
Accumulated depreciation through the end of last year	63,000
During the current year, the following expenditures were incurred for the equipment:

Major overhaul of the equipment on January 2 the current year that improved efficiency	$ 8,000
Routine repairs on the equipment	1,200
The equipment is being depreciated on a straight-line basis over an estimated life of 17 years with a $12,000 estimated residual value. The annual accounting period ends on December 31.

Required:
Indicate the effects of the following on the accounting equation.
Note: Enter decreases to account categories as negative amounts and do not round your intermediate calculations.

The adjustment for depreciation at the end of last year.
The two expenditures during the current year for (a) the major overhaul of the equipment and (b) repairs and maintenance.

Let's go step by step to identify the effects on the accounting equation based on the given scenario. The accounting equation is:

\[
\text{Assets} = \text{Liabilities} + \text{Equity}
\]

### 1. **Adjustment for Depreciation at the End of the Year**

Depreciation is calculated using the straight-line method:

\[
\text{Depreciation Expense per Year} = \frac{\text{Cost of Equipment} - \text{Residual Value}}{\text{Useful Life of Equipment}}
\]

Here:

- Cost of the equipment = $124,200
- Residual value = $12,000
- Useful life = 17 years

\[
\text{Depreciation Expense per Year} = \frac{124,200 - 12,000}{17} = \frac{112,200}{17} \approx 6,600
\]

At the end of the year, an additional depreciation of $6,600 will reduce the value of the equipment and decrease equity through a depreciation expense.

**Effect on the accounting equation:**

- **Assets**: $ -6,600 $ (reduction in equipment value)
- **Liabilities**: No change
- **Equity**: $ -6,600 $ (reduction due to depreciation expense)

---

### 2. **Expenditures During the Current Year**

#### (a) **Major Overhaul (January 2)**

The overhaul improves the efficiency of the equipment, so it's a capital expenditure. It increases the book value of the equipment and is not immediately expensed.

- Overhaul cost = $8,000

**Effect on the accounting equation:**

- **Assets**: $ +8,000 $ (increase in equipment value)
- **Liabilities**: No change
- **Equity**: No change (since this is capitalized, not expensed)

#### (b) **Routine Repairs and Maintenance**

Routine repairs are considered an expense and do not extend the equipment's life or efficiency. Therefore, they are recorded as an expense, which reduces equity.

- Routine repair cost = $1,200

**Effect on the accounting equation:**

- **Assets**: No change (since repairs are expensed, not capitalized)
- **Liabilities**: No change
- **Equity**: $ -1,200 $ (expense reduces equity)

---

### Final Summary of Effects

1. **Depreciation adjustment**:
   - **Assets**: $ -6,600 $
   - **Equity**: $ -6,600 $

2. **Major overhaul**:
   - **Assets**: $ +8,000 $

3. **Routine repairs**:
   - **Equity**: $ -1,200 $

### Would you like details on how capital expenditures and expenses differ? 

---

Here are five related questions to expand on this topic:
1. How does the accumulated depreciation account affect the book value of assets?
2. What are the main differences between capital expenditures and routine expenses?
3. How does straight-line depreciation differ from other methods, like double-declining balance?
4. What impact does depreciation have on taxes and cash flow?
5. How would the accounting equation change if the equipment was sold?

**Tip:** Routine maintenance expenses should always be expensed in the period they occur, whereas capital expenditures are added to the asset's value and depreciated over time.

Hulme Company operates a small manufacturing facility as a supplement to its regular service activities. At the beginning of the current year, an asset account for the company showed the following balances:

Manufacturing equipment $124,200
Accumulated depreciation through the end of last year $63,000
During the current year, the following expenditures were incurred for the equipment:

Major overhaul of the equipment on January 2 the current year that improved efficiency $8,000
Routine repairs on the equipment $1,200
The equipment is being depreciated on a straight-line basis over an estimated life of 17 years with a $12,000 estimated residual value. The annual accounting period ends on December 31.

Required:
Indicate the effects of the following on the accounting equation.
1. The adjustment for depreciation at the end of last year.
2. The two expenditures during the current year for (a) the major overhaul of the equipment and (b) repairs and maintenance.

Learn how to calculate depreciation using the straight-line method and understand the impact of equipment expenditures (major overhaul and repairs) on the accounting equation. This problem explores asset valuation, depreciation, and how routine expenses and capital expenditures affect equity and assets.

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