Champion Contractors completed the following transactions involving equipment.

***Year 1***

January 1

Paid $314,000 cash plus $12,560 in sales tax and $1,500 in transportation (FOB shipping point) for a new loader. The loader is estimated to have a four-year life and a $31,400 salvage value. Loader costs are recorded in the Equipment account.

January 3

Paid $5,000 to install air conditioning in the loader to enable operations under harsher conditions. This increased the estimated salvage value of the loader by another $1,500.

December 31

Recorded annual straight-line depreciation on the loader.

***Year 2***

January 1

Paid $4,000 to overhaul the loader’s engine, which increased the loader’s estimated useful life by two years.

February 17

Paid $1,000 for minor repairs to the loader after the operator backed it into a tree.

December 31

Recorded annual straight-line depreciation on the loader.

**Required:**

Prepare journal entries to record these transactions and events.

Let's prepare the journal entries for each transaction and event listed for Champion Contractors. We’ll record the equipment acquisition costs, any improvements that affect the equipment’s value or useful life, repairs, and the annual straight-line depreciation.

### Year 1

**1. January 1: Purchase of the loader**

The loader is purchased for $314,000, plus a sales tax of $12,560 and transportation costs of $1,500. Total cost is:
\[
314,000 + 12,560 + 1,500 = 328,060
\]

The journal entry:
\[
\begin{array}{l}
\text{Equipment} \quad \text{328,060} \\
\quad \text{Cash} \quad \quad \quad \text{328,060} \\
\text{(To record purchase of loader with additional costs)}
\end{array}
\]

**2. January 3: Installation of air conditioning**

The air conditioning installation cost is $5,000, which increases the estimated salvage value by $1,500.

\[
\begin{array}{l}
\text{Equipment} \quad \text{5,000} \\
\quad \text{Cash} \quad \quad \quad \text{5,000} \\
\text{(To record installation of air conditioning on loader)}
\end{array}
\]

**3. December 31: Depreciation for Year 1**

Now, we calculate annual straight-line depreciation. Initial cost basis of the loader with improvements is $333,060 ($328,060 + $5,000), with a salvage value of $32,900 ($31,400 + $1,500), and a useful life of 4 years.

\[
\text{Annual Depreciation} = \frac{333,060 - 32,900}{4} = 75,040
\]

The journal entry:
\[
\begin{array}{l}
\text{Depreciation Expense} \quad \text{75,040} \\
\quad \text{Accumulated Depreciation - Equipment} \quad \text{75,040} \\
\text{(To record annual depreciation on loader)}
\end{array}
\]

---

### Year 2

**4. January 1: Overhaul of loader’s engine**

The overhaul cost is $4,000, extending the useful life by two years (totaling 6 years from the purchase date). No entry for cash payment, only the Equipment account.

\[
\begin{array}{l}
\text{Equipment} \quad \text{4,000} \\
\quad \text{Cash} \quad \quad \quad \text{4,000} \\
\text{(To record engine overhaul)}
\end{array}
\]

**5. February 17: Minor repairs to the loader**

This repair does not improve value or extend life, so it's recorded as an expense.

\[
\begin{array}{l}
\text{Repairs Expense} \quad \text{1,000} \\
\quad \text{Cash} \quad \quad \quad \text{1,000} \\
\text{(To record minor repairs)}
\end{array}
\]

**6. December 31: Depreciation for Year 2**

Recalculate depreciation based on the updated book value and extended useful life. New basis is $337,060 ($333,060 + $4,000), with a salvage value of $32,900. Remaining useful life is now 5 years (4 years remaining from original + 2 from overhaul).

\[
\text{Annual Depreciation} = \frac{337,060 - 32,900}{5} = 60,832
\]

The journal entry:
\[
\begin{array}{l}
\text{Depreciation Expense} \quad \text{60,832} \\
\quad \text{Accumulated Depreciation - Equipment} \quad \text{60,832} \\
\text{(To record annual depreciation for Year 2)}
\end{array}
\]

---

Would you like more details on any part of this solution? 

### Related Questions
1. How would the entries change if the company used a different depreciation method?
2. How is a capital improvement distinguished from a repair expense?
3. What factors would lead a company to revise the useful life of an asset?
4. How does salvage value affect the depreciation calculation?
5. How does overhauling an engine affect the financial statements over time?

**Tip:** Consistently reviewing asset values can help in accurate financial reporting and making informed management decisions.

Learn how to record journal entries for equipment-related transactions, including acquisition, improvements, repairs, and straight-line depreciation calculations. Includes detailed solutions with calculations on cost basis, salvage value adjustments, and useful life extensions for accounting students.

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