Gordon Company started operations on January 1 of the current year. It is now December 31, the end of the current annual accounting period. The part-time bookkeeper needs your help to analyze the following three transactions: a. During the year, the company purchased office supplies that cost $2,300. At the end of the year, office supplies of $670 remained on hand.
b. On January 1 of the current year, the company purchased a special machine for cash at a cost of $23,500. The machine's cost is estimated to depreciate at $2,350 per year.
c. On July 1, the company paid cash of $840 for a two-year premium on an insurance policy on the machine; coverage began on July 1 of the current year.

Gordon Company

Analysis of Transactions at December 31:

a. Office Supplies $670 (DR)

  Office Supplies Expense $1,630 (DR)

b. Equipment $23,500 (DR)

   Accumulated Depreciation on Equipment $2,350 (CR)

   Depreciation Expense - Equipment $2,350 (DR)

c. Prepaid Insurance $630 (DR)

   Insurance Expense $210 (DR)

Explanation:

1. The Office Supplies Account will be debited with $2,300 and credited with $1,630 ($2,300 - $670) as Office Supplies Expense (used supplies) for the year.  This will leave a debit balance of $670 in the account.

2. The equipment account will be maintained at its cost, while a contra account (accumulated depreciation) is created to accumulate the depreciation expenses over the years.  The useful life of the equipment is 10 years ($23,500/$2,350) with an annual depreciation expense of $2,350.

3. The Prepaid Insurance Account will be debited with $840 and credited with $210 ($840/4) representing Insurance that expired during the year for six months.  The balance of $630 is carried forward for the remaining one and half years.

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