Identical products, as well as a large number of buyers and sellers, are characteristics of a market. In such markets, sellers o
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Answer:
The question has asked to first create the income statement with the gain/loss on sale of asset and then find for depreciation. However, in order to create the income statement, we require the gain/loss on sale of asset and to do this, we require the depreciation. Hence, the order has been slightly changed but titled easily for your convenience (1. Depreciation 2. Sale of Asset 3. Income statement. Please refer explanation.
Explanation:
1. DEPRECIATION
1.A. Straight-line depreciation:
It is the simplest method of calculating depreciation and believes that the asset's value depreciates equally every year.
Depreciation per year = (Cost of asset - salvage value) / number of useful life years.
Depreciation for Year 1 : (7000 - 500) / 5 = $1300
Depreciation for Year 2: (7000 - 500) / 5 = $1300
Depreciation for Year 3 : (7000 - 500) / 5 = $1300
1. B. Units of Production/ Activity based depreciation:
Activity based depreciation is whereby an asset is depreciated based on the asset’s activity such as the number of hours worked or the number of units produced, during a particular period of time. Activity based depreciation per year is calculated as:
[(Cost - Salvage value) x activity performed during the period] / Total estimated life activity of the asset
Year 1 Depreciation : (7000-500) x (3100 / 13000) = $1550
Year 2 Depreciation : (7000-500) x (2500 / 13000) = $1250
Year 3 Depreciation : (7000-500) x (3400 / 13000) = $1700
1.C. Double-declining balance Method:
This is where the asset's value is depreciated at twice the rate than the straight line method. The depreciation amounts would be higher in the early years of the asset's life and gradually reduce towards the end. Hence, it does not mean that the depreciation amount would be higher than the straight line basis.
Straight Line depreciation per year = 1/5* x 100 = 20%
*as it is useful for five years
Hence double-depreciation value = 20% x 2 = 40%
It is calculated as depreciation rate x book value of asset at the beginning of the period
OR (Cost of Asset - Accumulation Depreciation) x Depreciation rate
Depreciation for Year 1 : 7000 x 40% = $2800
Accumulated Depreciation : $2800
Depreciation for Year 2 : (7000 - 2800) x 40% = $1680
Accumulated Depreciation: $2800 + $1680 = $4480
Depreciation for Year 3 : (7000 - $4480) x 40% = $1008
2. GAIN OR LOSS ON SALE OF ASSET
2.A. Straight-line depreciation :
Accumulated Depreciation at the end of Year 3 : $1300 x 3 = $3900
Cost of asset at the end of Year : $7000 - $3900 = $3100
Asset was sold for $2100 while its net book value was $3100. This means that the asset was sold for LESS than what it was worth and hence is a LOSS on sale of asset.
Gain/Loss on sale of asset : Sale Price - Net book value
Loss on sale : $2100 - $3100= ($1000)
2.B. Units of Production method :
Accumulated depreciation at the end of the Year 3 : $1550 + $1250 + $1700 = $4100
Cost of asset at the end of Year 3 : $7000 - $4500 = $2500
Asset was sold for $2100 while its net book value was $2500. This means that the asset was sold for LESS than what it was worth and hence is a LOSS on sale of asset.
Gain/Loss on sale of asset : Sale Price - Net book value
Loss on sale : $2100 - $2500= ($400)
2.C. Reducing balance method :
Accumulated depreciation at the end of Year 3 : $2800 + $1680 + $1008 = $5488
Cost of asset at the end of Year 3 : $7000 - $5488 = $1512
Asset was sold for $2100 while its net book value was $1512. This means that the asset was sold for MORE than what it was worth and hence is a GAIN/PROFIT on sale of asset.
Gain/Loss on sale of asset : Sale Price - Net book value
Gain on sale : $2100 - $1512= $588
3. INCOME STATEMENT
Income statement with gain/loss on sale of asset using straight line depreciation, units of production method and reducing balance method has been provided in attached tables 1, 2 and 3 respectively.
Answer:
Part a
Ultimate Audio Company
<u>Sales Budget </u>
<u>For the Month Ending June 30</u>
Product and Area Unit Sales Volume Unit Selling Price Total Sales
Model U500 :
Northeast Region 140,000 $45 $6,300,000
Southwest Region 160,000 $45 $7,200,000
Total $13,500,000
Model U500 :
Northeast Region 100,000 $80 $8,000,000
Southwest Region 125,000 $80 $10,000,000
Total $18,000,000
Total Revenue from Sales $31,500,000
Part b
Ultimate Audio Company
<u>Production Budget </u>
<u>For the Month Ending June 30</u>
Model U500 Model S1000
Expected Units to be Sold 300,000 225,000
Add Desired Closing Inventory 30,000 15,000
Total 330,000 240,000
Less Desired Opening Inventory (25,000) (10,000)
Total Production 305,000 230,000
Explanation:
<em>Note : I have attached the complete question as images below !</em>
A Sales Budget shows the Total Expected Revenue from sale of budgeted units.
Total Revenue = Total Expected Units Sales x Selling Price Per Unit
A Production Budget shows the number of units to be produced to meet the Sales and Inventory targets
Total Production = Expected Sales + Desired Closing Inventory - Desired Opening Inventory
