Question

Nicole’s Getaway Spa (NGS) purchased a hydrotherapy tub system to add to the wellness programs at NGS. The machine was purchased at the beginning of the year at a cost of $16,000. The estimated useful life was five years and the residual value was $1,000. Assume that the estimated productive life of the machine is 10,000 hours. Expected annual production was year 1, 2,400 hours; year 2, 2,300 hours; year 3, 2,200 hours; year 4, 2,100 hours; and year 5, 1,000 hours.
Required:
1. Complete a depreciation schedule for each of the alternative methods.
A. Straight-line.
B. Units-of-production.
C. Double-declining-balance.
2. Assume NGS sold the hydrotherapy tub system for $3,000 at the end of year 3. Prepare the journal entry to account for the disposal of this asset under the three different methods.
1) Record the disposal of the hydrotherapy tub system for $3,000 in year 3 assuming depreciation was calculated using the straight line method.
2) Record the disposal of the hydrotherapy tub system for $3,000 in year 3 assuming depreciation was calculated using the units-of-production method.
3) Record the disposal of hydrotherapy tub system for $3,000 in year 3 assuming depreciation was calculated using the double-declining method.

Answer 1

Answer:

Nicole's Getaway Spa (NGS)

1. Depreciation Schedules:

A. Straight-line method:

Year       Depreciation    Book Value   Accumulated   Net Book Value

                Expense            of asset      Depreciation

Year 1        $3,000            $16,000            $3,000             $13,000

Year 2         3,000              16,000               6,000               10,000

Year 3         3,000              16,000               9,000                7,000

Year 4         3,000              16,000             12,000                4,000

Year 5         3,000              16,000             15,000                1,000

B. Units-of-production method:

Year       Depreciation    Book Value   Accumulated   Net Book Value

                Expense            of asset      Depreciation

Year 1        $3,600            $16,000             $3,600              $12,400

Year 2         3,450               16,000               7,050                  8,950

Year 3         3,300               16,000             10,350                  5,650

Year 4         3,150                16,000             13,500                  2,500

Year 5        1,500                16,000             15,000                   1,000

C. Double-declining-balance method:

Year       Depreciation    Book Value   Accumulated   Net Book Value

                Expense            of asset      Depreciation

Year 1        $6,400            $16,000             $6,400              $9,600

Year 2         3,840               16,000              10,240                 5,760

Year 3         2,304               16,000              12,544                 3,456

Year 4          1,382               16,000              13,926                 2,074

Year 5         1,074                16,000             15,000                  1,000

2. Sale of machine for $3,000 at the end of year 3:

Journal Entry of disposal:

1) Straight-line method:

Debit Cash $3,000

Credit Sale of Equipment $3,000

To record the disposal of the equipment.

Debit Sale of Equipment $16,000

Credit Equipment $16,000

To transfer equipment to sale of equipment.

Debit Accumulated Depreciation $9,000

Credit Sale of Equipment $9,000

To close accumulated depreciation.

Debit Income Summary $4,000

Credit Sale of Equipment $4,000

To record the loss from sale of equipment.

2) Units-of-production method:

Debit Cash $3,000

Credit Sale of Equipment $3,000

To record the disposal of the equipment.

Debit Sale of Equipment $16,000

Credit Equipment $16,000

To transfer equipment to sale of equipment.

Debit Accumulated Depreciation $10,350

Credit Sale of Equipment $10,350

To close accumulated depreciation.

Debit Income Summary $2,650

Credit Sale of Equipment $2,650

To record the loss from sale of equipment.

3) Double-declining method:

Debit Cash $3,000

Credit Sale of Equipment $3,000

To record the disposal of the equipment.

Debit Sale of Equipment $16,000

Credit Equipment $16,000

To transfer equipment to sale of equipment.

Debit Accumulated Depreciation $12,544

Credit Sale of Equipment $12,544

To close accumulated depreciation.

Debit Income Summary $456

Credit Sale of Equipment $456

To record the loss from sale of equipment.

Explanation:

a) Data and Calculations:

Cost of machine =     $16,000

Residual value =             1,000

Depreciable amount $15,000

Estimated useful life = 5 years

Annual depreciation expense/rate:

A. Straight-line method = $3,000 ($15,000/5)

B. Unit of production method = $1.50 per unit ($15,000/10,000)

Year 1 = $3,600 (2,400 * $1.50)

Year 2 = $3,450 (2,300 * $1.50)

Year 3 = $3,300 (2,200 * $1.50)

Year 4 = $3,150 (2,100 * $1.50)

Year 5 = $1,500 (1,000 * $1.50)

C. Double-declining balance method:

Straight-line method rate = 20% (100/5)

Double-declining rate = 40% (20% * 2)

Year 1 = $6,400 ($16,000 * 40%) Balance $9,600

Year 2 = $3,840 ($9,600 * 40%) Balance $5,760

Year 3 = $2,304 ($5,760 * 40%) Balance $3,456

Year 4 = $1,382 ($3,456 * 40%) Balance $2,074

Year 5 = $1,074 ($2,078 - $1,000) Balance $1,000