Question

Problem 2 On January 7, 2014 a company purchased a machine for $75,000 that was expected to last 5 years and to have a salvage value of $5,000. At the beginning of the machine's third year the company decided that the machine's estimated useful life should be revised to a total of 7 years instead of the original 5 years. Also, the salvage value was re-estimated to be $2,000. Straight-line depreciation will be used throughout the machine's life. 2a. Prepare a depreciation schedule (using Excel) showing columns for: year-ended; annual depreciation expense; accumulated depreciation; and remaining book value for each year of its useful life. 2b. Assume the same information above except that the machine is sold on June 30, 2019 for $15,000 cash. Prepare any general journal entries needed to record the sale of the machine.

Answer 1

2a. First of all we need to determine Annual Depreciation for Machine using Straight Line Method of Depreciation.

Depreciation under SLM Cost of Asset - Salvage Value Useful life of Asset $75,000 - $ 5,000 5 Year $14,000 annually

Following is the Table of Depreciation for Machine:

		1	2	3	(1-2)
Sr No.	Year Ended	Opening Book Value	Annual Depreciation	Accumulated Depreciation	Closing Book Value
1	2014	$75,000	$14,000	$14,000	$61,000
2	2015	$61,000	$14,000	$28,000	$47,000
3	2016	$47,000	$9,000	$37,000	$38,000
4	2017	$38,000	$9,000	$46,000	$29,000
5	2018	$29,000	$9,000	$55,000	$20,000
6	2019	$20,000	$9,000	$64,000	$11,000
7	2020	$11,000	$9,000	$73,000	$2,000

How Depreciation of $9,000 is calculated?:

There is a change in useful life of the machine in 3^rd year. It is expected that machine will be used for 7 years instead of original estimate of 5 years. In such scenario we need to calculate revised annual depreciation to incorporate change in useful life. We shall use following figures for details available:

Original Cost of Machine = $75,000

Accumulated Depreciation at end of 2^nd year = $28,000

Revised Salvage Value = $2,000

Remaining useful life at end of 2^nd year = 5 Year (7 Years Less 2 Years for which machine is already used)

Putting available details in following formula:

Revised Depreciation = (Cost of Machine - Accumulated Depreciation) - Salvage Value Remaining Useful life of Asset ($ 75,000 - $ 28,000) - $2,000 5 Year $9,000 annually

2b.

If Machine is sold on June 30, 2019, same will be depreciated for first six month of 2019. Hence, Depreciation of $4,500 ($9,000 X 6/12) will be added to accumulated depreciation. Updated Balance of Accumulated Depreciation would be $59,500 ($55,000 from 2018YE plus Depreciation of six months $4,500).

Net Book Value of Machine is $15,500 ($75,000 - $59,500), for which consideration of $15,000 is received. This will result in Loss on Disposal of asset to the extent of $500.

Journal Entry for above given transaction shall be as follows:

Date	Particulars	Debit	Credit
30-Jun-19	Cash	$15,000
	Accumulated Depreciation	$59,500
	Loss on disposal of machine	$500
	Machine		$75,000
	(Machine is sold for $15,500 in cash.)