Question

Depreciation by Two Methods; Sale of Fed Asset New retreading equipment, acquired at a cost of $875.000 on September 1 at the beginning of a fiscal year has an estimated We of five years and an estimated residual value of 175.000 manager requested information regarding the effect of strative 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, on September 6, the equipment was sold for $128.100. Required 1. Determine the annual depreciation expense for each of the estimated four 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 the following methods: a. Straight-line method Depreciation Accumulated Depreciation, End of Year Book Value End of Year b. Double doctring balance method Depreciation Accumulated Depreciation Book Value of Yes

Answer 1

1) Straight Line Method:

Depreciation p.a. = Purchase cost - Residual Value / No. of years

= 875000-75300/5

= 159940

Year	Depreciation Expenses	Accumulated Depreciation	Book Value of the Asset
1	159940	159940	715060
2	159940	319880	555120
3	159940	479820	395180
4	159940	639760	235240
5	159940	799700	75300

2) Rate of depreciation under double declining method:

1 - (Residual Value/Cost Price)^1/n (i.e. useful life)

1 - (75300/875000)^1/5

1-0.6123

= 0.3876

i.e. 38.76% p.a.

Year	Depreciation Expenses	Accumulated Depreciation	Book Value of the Asset
1	339150	339150	535850
2	207695.46	546845.46	328154.54
3	127192.70	674038.16	200961.84
4	77892.81	751930.97	123069.03
5	47701.55	799632.52	75367.47

3) Journal Entry for recording sale transaction:

Bank A/c____________Dr. 128100 -

To Asset A/c - 75367.47

To Gain on sale of Asset - 52732.53

(Being sale of asset recorded including gain on sale of asset)

4) Journal Entry for recording sale transaction:

Bank A/c____________Dr. 110000 -

   To Asset A/c - 75367.47

To Gain on sale of Asset - 34632.53

(Being sale of asset recorded including gain on sale of asset)