Question

A new machine costs $120,000, has an estimated useful life of five years and an estimated salvage value of $15,000 at the end of that time. It is expected that the machine can produce 210,000 widgets during its useful life. The New Times Company purchases this machine on January 1, 2019, and uses it for exactly three years. During these years the annual production of widgets has been 80,000, 50,000 and 30,000 units, respectively. On January 1 2022, the machine is sold for 45,000.

Required:

1) Calculate the depreciation expense for each of the three years using: a) Straight line b) units of production c) double declining balance

2) prepare the proper journal entry for the sale of the machine under the three different depreciation methods.

Answer 1

Solution:

Requirement 1: Depreciation Expense

Year	a)Straight-Line Method	b) Units-of-Production Method	c) Double-Declining-Balance Method
2019	$              21,000	$             40,000	$                   48,000
2020	$              21,000	$             25,000	$                   28,800
2021	$              21,000	$             15,000	$                   17,280
Totals	$              63,000	$             80,000	$                   94,080

Notes:

1) Straight-Line Method = $ 120,000 - $15,000 / 5 Years = $ 21,000 per year

2) Units-of-Production Method

Year	Units-of-Production	Units	Calculation
2019	$       40,000	80,000	(120000-15000)/210000 Units * 80000 Units
2020	$       25,000	50,000	(120000-15000)/210000 Units * 50000 Units
2021	$       15,000	30,000	(120000-15000)/210000 Units * 30000 Units
Totals	$       80,000

3) Double-Declining-Balance Method

Year	Opening Balance	Depreciation	Accumulated Depreciation	Closing Balance
2019	$           120,000	$             48,000	$                   48,000	$          72,000
2020	$              72,000	$             28,800	$                   76,800	$          43,200
2021	$              43,200	$             17,280	$                   94,080	$          25,920

Requirement 2:

Straight-Line Method:

Date	Account Titles and Explanation	Debit	Credit
Jan. 1	Cash	$   45,000
	Accumulated Depreciation	$   63,000
	Loss on sale of machinery	$   12,000
	Machinery		$ 120000
	[ Being machinery sold ]

Units-of-Production Method:

Date	Account Titles and Explanation	Debit	Credit
Jan. 1	Cash	$   45,000
	Accumulated Depreciation	$   80,000
	Gain on sale of machinery		$    5,000
	Machinery		$ 120000
	[ Being machinery sold ]

Double-Declining-Balance Method:

Date	Account Titles and Explanation	Debit	Credit
Jan. 1	Cash	$   45,000
	Accumulated Depreciation	$   94,080
	Gain on sale of machinery		$ 19,080
	Machinery		$ 120000
	[ Being machinery sold ]