Question

New lithographic equipment, acquired at a cost of $800,000 at the beginning of a fiscal year, has an estimated useful life of five years and an estimated residual value of $90,000. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year. On the basis of the data presented to the manager, the double-declining-balance method was selected.
In the first week of the fifth year, the equipment was sold for $135,000.

Required:

1. Determine the annual depreciation expense for each of the estimated five years of use, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by the following methods:

a. Straight-line method

Year Depreciation Expense Accumulated Depreciation, End of Year Book Value, End of Year
1 $ $ $
2 $ $ $
3 $ $ $
4 $ $ $
5 $ $ $
b. Double-declining-balance method

Year Depreciation Expense Accumulated Depreciation, End of Year Book Value, End of Year
1 $ $ $
2 $ $ $
3 $ $ $
4 $ $ $
5 $ $ $
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2. Journalize the entry to record the sale, assuming double-declining balance method is used. If an amount box does not require an entry, leave it blank.

3. Journalize the entry to record the sale, assuming that the equipment was sold for $88,750 instead of $135,000. If an amount box does not require an entry, leave it blank.

Answer 1

Answer:

a. Straight-line Method :

Year     Depreciation   Accumulated    End of Year Book Value

0          Expense          Depreciation    $800,000

1            $142,000        $142,000          $ 658,000

2           $142,000        $284,000         $ 516,000

3           $142,000        $426,000         $ 374,000

4           $142,000        $568,000         $ 232,000

5           $142,000        $710,000            $90,000

b. Double-Declining-Balance Method:

Year     Depreciation   Accumulated    End of Year Book Value

0          Expense          Depreciation    $800,000

1            $320,000        $320,000        $ 480,000

2           $192,000          $512,000        $ 288,000

3            $115,200         $627,200         $ 172,800

4             $69,120         $696,320         $ 103,680

5             $13,680          $710,000          $90,000

2. Journal entry to record the sale, assuming double-declining balance method:

Debit Cash $135,000

Credit Sale of Equipment $135,000

To record sale of equipment.

Debit Sale of Equipment $103,680

Debit Accumulated Depreciation $696,320

Credit Equipment $800,000

To record close of accumulated depreciation and equipment accounts.

3. Journal entry to record sale, assuming equipment was sold for $88,750:

Debit Cash $88,750

Credit Sale of Equipment $88,750

To record sale of equipment.

Debit Sale of Equipment $103,680

Debit Accumulated Depreciation $696,320

Credit Equipment $800,000

To record close of accumulated depreciation and equipment accounts.

Explanation:

a) Straight-line method of depreciation applies the same amount of depreciation charge over the life of the asset.  It is calculated by subtracting the salvage value from the asset and dividing the resulting figure by the number of useful life in years.  It is very simple, but does not take into consideration maintenance costs incurred as assets age.  Therefore, it does not spread the costs of the asset evenly over the periods the asset is in use, or according to the productivity value of the asset in each period.

b) Declining balance method of depreciation accelerates depreciation charge initially but the annual expense declines with age of the fixed asset.  Under this method, depreciation expense is calculated by applying the depreciation rate to the book value of the asset at the start of the period.