Question

Assume the same facts as in TVM3a,3b,3c.
$ $ $ $ $ $ $ Add years 1-8 to check on total depreciation $ 1,600,000 160,000 1,440,000 Year 1 200,000 20,000 180,000 Sales Revenue Cost of Goods Sold Gross Profit Year 2 200,000 20,000 180,000 Year 3 200,000 20,000 180,000 Year 4 200,000 20,000 180,000 Year 5 200,000 20,000 180,000 Year 6 200,000 $ 20,000 180,000 Year 7 200,000 20,000 180,000 Year 8 200,000 20,000 180,000 For last column enter as a percentage of Sales Revenue 100.0% 10.0% 90.0% 0.0% 16.9% 73.1% 0.0% 14.2% 58.9% 0.0% 12.4% 46.5% Depreciation Expense Operating Income 33,750 146,250 33,750 146,250 33,750 146,250 33,750 146,250 33,750 146,250 33,750 146,250 33,750 146,250 33,750 146,250 270,000 1,170,000 Interest Expense Income before taxes 43,200 103,050 40,166 106,084 36,647 109,603 32,565 113,685 27,830 118,420 22,338 123,912 15,966 130,284 8,575 137,675 227,288 942,712 Income tax expense Net Income 21,641 81,410 2 2.278 83,806 23,017 86,586 23,874 89,811 $ 24,868 93,552 $ 26,022 97,891 $ 27,360 102,924 $ 28,912 108,763 197,970 744,743 $ $ $ $

The company has a single source of cash revenue of $200,000 per year, and Cost of Goods Sold of $20,000 per year. The machine we purchased is depreciated straight line over eight years with no residual value(these assumptions will change below) and is classified as Selling, General and Administrative expense, not part of Cost of Goods Sold. Also assume that the company has a tax rate of 21 percent.

The machine is depreciated straight line over eight years with a $50,000 estimated residual value. The machine was actually sold at the end of the eighth year for $40,000.

3d: Record the depreciation expense journal entry at end of year 1,2,3,4,5,6,7,8 (if they are the same for each year, you can enter it once, and indicate the same for each year).

3e: Record the journal entry for the sale assuming the sale is recorded after the annual depreciation expense.

3f: Prepare a multi-step income statement for years 1 through 8. You will need to add a line for the gain or loss in year 8, and it must be in the appropriate subtotal.

Answer 1

(a) & (b)

S.No	Particulars	Amount
1	Cost of the Asset	$3,00,000
2	Residual Value	$50,000
3	Depreciable Value (1-2)	$2,50,000
4	Life of the Asset (Years)	8
5	Depreciation expense per year (3/4)	$31,250
6	Book value in year 8 ( After Depreciation )(1-2)	$50,000
7	Sale Proceeds	$40,000
8	Loss on Sale (6-7)	$10,000

Journal Entries in the books of Risoner Company
Date	Particulars		Debit	Credit
Year 1 - 8	Depreciation Expense A/C	Dr	$31,250
	Machinery A/C			$31,250
	Being Depreciation expense charged for the Machinery
Year 8	Cash A/C	Dr	$40,000
	Loss on sales of Machinery	Dr	$10,000
	Machinery A/C			$50,000
	Being Machinery Sold
Year 8	Profit and Loss A/C	Dr	$10,000
	Loss on Sale of Machinery			$10,000
	Being Loss on Sale charged to Profit and Loss A/C

Journal Entry for Depreciation expense will be the same for every Year i.e from year 1 to Year 8.

c)

Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Addition of Year 1 to 8	Percentage of last column for the sales
Sales Revenue	$2,00,000	$2,00,000	$2,00,000	$2,00,000	$2,00,000	$2,00,000	$2,00,000	$2,00,000	$16,00,000	100.00%
Cost of Goods Sold	$20,000	$20,000	$20,000	$20,000	$20,000	$20,000	$20,000	$20,000	$1,60,000	10.00%
Gross Profit	$1,80,000	$1,80,000	$1,80,000	$1,80,000	$1,80,000	$1,80,000	$1,80,000	$1,80,000	$14,40,000	90.00%
Depreciation Expense	$31,250	$31,250	$31,250	$31,250	$31,250	$31,250	$31,250	$31,250	$2,50,000	15.63%
Operating Income	$1,48,750	$1,48,750	$1,48,750	$1,48,750	$1,48,750	$1,48,750	$1,48,750	$1,48,750	$11,90,000	74.38%
Interest Expense	$43,200	$40,166	$36,647	$32,565	$27,830	$22,338	$15,966	$8,575	$2,27,287	14.21%
Loss on Sale of Machinery								$10,000	$10,000
Income Before Tax	$1,05,550	$1,08,584	$1,12,103	$1,16,185	$1,20,920	$1,26,412	$1,32,784	$1,30,175	$9,52,713	59.54%
Income Tax Expense	$22,166	$22,803	$23,542	$24,399	$25,393	$26,547	$27,885	$27,337	$2,00,070	12.50%
Net Income	$83,385	$85,781	$88,561	$91,786	$95,527	$99,865	$1,04,899	$1,02,838	$7,52,643	47.04%