Question

Hawaiian Specialty Foods purchased equipment for $29,000. Residual value at the end of an estimated four-year service life is expected to be $2,900. The machine operated for 3,000 hours in the first year, and the company expects the machine to operate for a total of 18,000 hours.

Calculate depreciation expense for the first year using each of the following depreciation methods: (1) straight-line, (2) double-declining-balance, and (3) activity-based. (Do not round your intermediate calculations.)

Part Two:
  

Orion Flour Mills purchased a new machine and made the following expenditures:

   

Purchase price	$63,000
Sales tax	5,400
Shipment of machine	880
Insurance on the machine for the first year	580
Installation of machine	1,760

  

The machine, including sales tax, was purchased on account, with payment due in 30 days. The other expenditures listed above were paid in cash.

  

Required:

Record the above expenditures for the new machine. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Part 3:

Whole Grain Bakery purchases an industrial bread machine for $25,000. In addition to the purchase price, the company makes the following expenditures: freight, $1,500; installation, $3,000; testing, $1,000; and property tax on the machine for the first year, $500.

What is the initial cost of the bread machine?
  

Part 4:

Granite Stone Creamery sold ice cream equipment for $15,200. Granite Stone originally purchased the equipment for $88,000, and depreciation through the date of sale totaled $70,000.

What was the gain or loss on the sale of the equipment? also list the "sale amount", "less", cost of ice cream equipment, and book value>
  

Answer 1

Answer :-

Calculation of depreciation expense for the first year using each of the following depreciation methods: (1) straight-line, (2) double-declining-balance, and (3) activity-based

1) Straight line method -

Cost of Equipment (Purchase price) = $29,000

Estimated service life = 4 year

Residual value = $2,900

Depreciation Expense = ( Cost of Equipment - Residual value ) / Estimated service life

Depreciation expense = ($29,000 - $2,900)/4

Depreciation expense using Straight line method = $ 6,535

2)Double-declining balance method :-

Depreciation expense = 2 × Cost of Equipment /Estimate Service life

Depreciation Expense = 2 × $29,000 /4

Depreciation Expense using Double declining balance method = $ 14,500

3)Activity-based method :-

Depreciation Expense ={ (Cost of Equipment - Residual value ) / Total Expected hours machine operate } × Actual hours machine operate

Total Expected hours machine operate = 18,000 hours

Actual hours machine operate = 3,000 hours

Depreciation Expense = {( $29,000 - $2,900) / $18,000} × 3,000

Depreciation Expense = $1.45 × 3,000

Depreciation Expense using Activity based method = $4,350

.

Journal entries of expenditures for the new machine are as follows :-

Date	General Journal	Debit	Credit
	Machinery A/c Dr.	$71,040
	Prepaid Insurance A/c Dr.	$580
	To Accounts Payable A/c		$68,400
	To Cash A/c		$3,220

Explanation:-

Machinery = Purchase price of machine + Sales tax + Shipment of machine + Installation of machine

Machinery = $63,000 + $5,400 + $880 + $1,760

Machinery = $71,040

Given that the machine Purchase price and sales tax, was purchased on account. The other expenditures listed above were paid in cash.

So Account Payable = $63,000 + $5,400

Account payable = $68,400

Cash = $880 + $ 580 + $ 1,760 = 3,220

.

The initial cost of the bread machine are as follows :-

Given , Purchase price of machine = $25,000

Freight = $ 1,500

Installation charges = $ 3,000

Testing charges = $1,000

Property tax on the machine is not included in cost of machine

Initial cost of bread machine = Purchase price of machine + Freight + Installation charges + Testing charges

Initial cost of bread machine = $25,000 + $1,500 + $3,000 + $1,000

Initial cost of bread machine = $30,500

.

Part 4:

The gain or loss on the sale of the equipment are as follows :-

Particular		Amount
Sale Amount		$ 15,200
Less :-
Cost of Ice cream equipment	$88,000
Less :- depreciation through the date of sale	$70,000
Book value (Cost of Ice cream equipment - Depreciation through the date of sale)		$18,000
Gain /(Loss) on sale of Equipment( Sale Amount - Book value)		($2,800)