Question

Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangible, and Natural Resources HANDOUT 8-1 DEPRECIATION METHODS AND GAINYOR LOSS) ON SALE Joel Harvey Florists ordered a truck at an invoice price of $11,000 On the date of delivery, January 2, Year 1, the company paid $1,000 on the truck, with the balance on credit at 10 percent interest due in six months. On January 3, Year 1, the company paid $500 for freight on the truck. On January 4, Year 1, the company paid $250 to paint the company name on the side of the truck and started using it to make deliveries. On January 5, the company paid $125 to fix a flat tire on the truck. On July 2, Year 1, the company paid the balance due on the truck plus the interest. The estimated useful life of the truck was five years, and the residual value was $1,750. Assume that the estimated productive life of the machine was 100,000 miles. Actual annual usage was 15,000 miles hours in Year 1; 25,000 miles in Year 2; 30,000 miles in Year 3; 25,000 miles in Year 4, and 5,000 miles in Year 5. On December 31, Year 5, Joel Harvey sold the truck for $3,000 cash. 1. Compute the acquisition cost of the truck. 2. Compute the annual depreciation expense for each of the years 1 through 5 using each of the following methods: • Straight-line • Unit-of-production • Declining-balance 3. Compute the gain (or loss) on sale. 8-20 Copyright 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written conser of McGraw-ar Education.

Answer 1

Answer:

1. Acquisition cost of the Truck

Invoice price of truck	$ 11,000.00
Freight charges on the truck	$        500.00
Cost of name on the side of the truck	$        250.00
Cost of the Truck	$ 11,750.00

2. Annual Depreciation expenses

a) Straight line depreciation.

Depreication = (Cost of asset - residual value) / useful life of asset

Depreciation = (11750-1750)/5 = 2,000

Year	Cost of Asset	Depreciation	Book Value
1	$                 11,750.00	$          2,000.00	$   9,750.00
2	$                   9,750.00	$          2,000.00	$   7,750.00
3	$                   7,750.00	$          2,000.00	$   5,750.00
4	$                   5,750.00	$          2,000.00	$   3,750.00
5	$                   3,750.00	$          2,000.00	$   1,750.00

b) Unit of production method:

Depreciation = (Cost of Asset - Residual value)/Estimated total units to be produced *Actual units produced

Year	Cost of Asset	Productive life	Depreciation	Book Value
1	$                 11,750.00	15,000.00	$          1,500.00	$ 10,250.00
2	$                 10,250.00	25,000.00	$          2,500.00	$    7,750.00
3	$                   7,750.00	30,000.00	$          3,000.00	$    4,750.00
4	$                   4,750.00	25,000.00	$          2,500.00	$    2,250.00
5	$                   2,250.00	5,000.00	$             500.00	$    1,750.00
Total		100,000.00	10,000.00

c) Decline Balance method

Depreciation = Declining balance method of depreciation is an accelerated depreciation method in which the depreciation expense declines with age of the fixed asset. Depreciation expense under the declining balance is calculated by applying the depreciation rate to the book value of the asset at the start of the period.

Year	Cost of Asset	Depreciation rate	Depreciation(150% Decline)	Book Value
a	b	c = 1/5	d= b*[c*1.5]	e=b-d
1	$                 11,750.00	20%	$                  3,525.00	$    8,225.00
2	$                   8,225.00	20%	$                  2,467.50	$    5,757.50
3	$                   5,757.50	20%	$                  1,727.25	$    4,030.25
4	$                   4,030.25	20%	$                  1,209.08	$    2,821.18
5	$                   2,821.18	20%	$                  1,071.17	$    1,750.00

Note: Last year depreciation should be adjusted to residual value of the asset

3. Computation of loss or gain on sale

Sale value of truck = 3,000

Book value of truck at the end of 5th year = 1,750

Gain on sale = 3000-1750 = 1,250