Question

On 1/1/18 Meganco purchased a new lathe for $400,000 installed. The physical life of the lathe is 10 years with a salvage value of $20,000 at the end of that time period. The lathe was purchase for a contract that will provide revenue to Meganco for 5 years. The lathe will be sold at the end of the contract for $50,000. Required: Make the required journal entry on 12/31/18 and 12/31/19 assuming that the lathe is depreciated using 200% double declining balance.

Answer 1

Solution:

Useful Life of asset= 5 years

Salvage Value after 5 years = $50,000

Rate of straight line depreciation = 1/useful life

= 1/5 = 20%

Depreciation in year 1 = 2 x Rate of straight line depreciation x Book Value at the beginning of the period

= 2 x 20% x $400,000

= 40% of $400,000 = $160,000 in year 1

Depreciation in year 2 = 40% of ($ 400,000- $160,000)

= 40% of $ 240,000 = $ 96,000 in year 2

Date	Journal	Debit	Credit
12/31/2019	Depreciation	$160,000
	Accumulated Depreciation		$ 160,000
	( To record annual depreciation expense)
12/31/2019	Depreciation	$ 96,000
	Accumulated Depreciation		$ 96,000
	(To record annual depreciation expense)