Question

Part One (2018 and 2019): Andy's Anvils is a blacksmith company located in Bozeman, Montana. The company was formed in 1915 and is currently 100% owned by Andy Anderson. On January 1, 2018 the company purchased 2 used anvils. The cost of the anvils including sales tax and shipping was $120,000. Mr. Anderson estimates that the new anvils will last 10 years and can be used to forge 10,000 horseshoes. He also has evidence that the anvils can be sold as metal scrap in 10 years for $20,000. Requirements: (1) Compute depreciation expense for both 2018 and 2019 using the (a) straight-line method, (b) the double-declining-balance method, and (c) the units of activity method (note: 800 horseshoes were forged in 2018, and 1,200 horseshoes were forged in 2019). (2) Prepare the balance sheet and income statement presentation of the anvils and related depreciation expense for FYE 12/31/2019. Part Two (2020): On December 31, 2020, the anvils were sold to an antique dealer for $1,000,000 in cash. Assume the company consistently uses the straight-line method to compute depreciation, and that no depreciation for 2020 had yet been recorded. Requirements: (1) Prepare the journal entries to record depreciation expense for 2020 and the sale of the anvils.

Answer 1

Part One

1(a) Straight-line method

Annual depreciation expense = (Cost - Residual value)/Estimated useful life = ($120000 - $20000)/10 = $10000

	2018	2019
Depreciation expense	$       10,000	$       10,000

(b) Double-declining-balance method

Straight-line depreciation rate = 100%/Estimated useful life = 100%/10 = 10%

Double-declining depreciation rate = 2 x 10% = 20%

	2018	2019
Depreciation expense	$       24,000	$       19,200

2018: 20% x $120000 = $24000

2019: 20% x ($120000 - $24000) = 20% x $96000 = $19200

(c) Units of activity method

Depreciation per unit of activity = (Cost - Residual value)/Total units of activity = ($120000 - $20000)/10000 = $10 per horseshoe forged

	2018	2019
Depreciation expense	$         8,000	$       12,000

2018: 800 x $10 = $8000

2019: 1200 x $10 = $12000

2. Amounts under all three methods have been shown in a tabular form.

Andy's Anvils
Balance Sheet (Partial)
At 12/31/2019
Assets
	Straight-line	DDB	Units of Activity
Equipment	120000	120000	120000
Less: Accumulated depreciation	20000	43200	20000
Equipment, net	100000	76800	100000
Andy's Anvils
Income Statement (Partial)
For Year Ended 12/31/2019
	Straight-line	DDB	Units of Activity
Expenses:
Depreciation expense	10000	19200	12000

Part Two

Account Titles and Explanation	Debit	Credit
Depreciation expense	10000
Accumulated depreciation		10000
(To record depreciation expense)
Cash	1000000
Accumulated depreciation	30000
Equipment		120000
Gain on disposal		910000
(To record sale of the anvils)