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 (a) the straight-line method and (b) the double declining- balance method. 2. On January 1, journalize the entry to record the sale. Refer to the Chart of Accounts for exact wording of account titles. 3. On January 1, journalize the entry to record the sale, assuming that the equipment was sold for $88,750 instead of $135,000. Refer to the Chart of Accounts for exact wording of account titles.

Answer 1

Answer:

Alternative Depreciation Methods

(a) the straight-line method calculations:

Annual depreciation expense for each of the five years of use = $142,000 ($710,000/5)

(b) the double declining- balance method calculations:

Depreciation rate = 100%/5 * 2 = 40%

1st year Depreciation = $320,000 ($800,000 * 40%)

2nd year Depreciation = $192,000 ($480,000 * 40%)

3rd year Depreciation = $115,200 ($288,000 * 40%)

4th year Depreciation = $69,120 ($172,800 * 40%)

5th year Depreciation = $13,680 ($103,680 - $90,000)

2. Journal Entries (double-declining-balance method):

Debit Sale of Equipment $800,000

Credit Equipment $800,000

To transfer the equipment to Sale of Equipment account.

Debit Accumulated Depreciation $696,320

Credit Sale of Equipment $696,320

To transfer the accumulated depreciation to Sale of Equipment account.

Debit Cash $135,000

Credit Sale of Equipment $135,000

To record the proceeds from the sale of the equipment.

3. Journal Entries (double-declining-balance method):

Debit Sale of Equipment $800,000

Credit Equipment $800,000

To transfer the equipment to Sale of Equipment account.

Debit Accumulated Depreciation $696,320

Credit Sale of Equipment $696,320

To transfer the accumulated depreciation to Sale of Equipment account.

Debit Cash $88,750

Credit Sale of Equipment $88,750

To record the proceeds from the sale of the equipment.

Explanation:

a) Data and Calculations:

Cost of the new lithographic equipment = $800,000

Estimated useful life = 5 years

Estimated residual value = $90,000

Depreciable amount = $710,000 ($800,000 - $90,000)

Sales proceeds in the first week of the fifth year = $135,000