Question

PR 10-4A Depreciation by two methods; sale of fixed asset OBJ. 2, 3 New lithographic equipment, acquired at a cost of $800,000 on March 1 of Year 1 (begin. ning of the 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 March 4 of Year 5, the equipment was sold for $135,000.

Answer 1

1a) Depreciation schedule :
Straight line dep = (800000-90000)5 = 142000
Year	Depreciation expenses	Accumulated depreciation end of year	book value
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 decline balance method :
straight line rate = 100/5=20%
Double decline rate = 20*2=40%
Year	Depreciation expenses	Accumulated depreciation end of year	book value
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) Entry to record the sale :
Date	accounts & explanation	debit	credit
	Cash a/c	$      135,000
	Accumulated depreciation	$      696,320
	Gain on sale of equipment		$        31,320
	Equipment		$      800,000
	(To record sale of equipment)
3) Equipment sold for 88750
date	accounts & explanation	debit	credit
	Cash a/c	$        88,750
	Accumulated depreciation	$      696,320
	Loss on sale of equipment	$        14,930
	Equipment		$      800,000
	(TO record sale of equipment)