Question

Depreciation by Two Methods; Sale of Fixed Asset New lithographic equipment, acquired at a cost of $812,500 on March 1 of Year 1 (beginning of the fiscal year), has an estimated useful life of five years and an estimated residual value of $69,900. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year. On March 4 of Year 5, the equipment was sold for $119,000. Required: 1. Determine the annual depreciation expense for each of the estimated five years of use, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by the following methods: a. Straight-line method Year Depreciation Expense Accumulated Depreciation, End of Year Book Value, End of Year 1 $ $ $ 2 $ $ $ 3 $ $ $ 4 $ $ $ 5 $ $ $ b. Double-declining-balance method Year Depreciation Expense Accumulated Depreciation, End of Year Book Value, End of Year 1 $ $ $ 2 $ $ $ 3 $ $ $ 4 $ $ $ 5 $ $ $ 2. Journalize the entry to record the sale assuming that the manager chose the double declining-balance method. If an amount box does not require an entry, leave it blank. 3. Journalize the entry to record the sale in (2) assuming that the equipment was sold for $102,100 instead of $119,000. If an amount box does not require an entry, leave it blank.

Answer 1

1)
a)	Straight Line Method
	Cost of the machinery			$   812,500.00
	Service life			5	years
	Residual value			$     69,900.00
	Annual depreciation under straight line method				($ 812500 - $ 69900)/ 5 years =			$ 148,520.00
	End of Annual Period		Beginning of		Depreciation		Depreciation		Accumulated		Book Value
			Period Book Value		Rate		Expense		Depreciation
	1		$ 742,600.00		-		$ 148,520.00		$      148,520.00		$ 594,080.00
	2		$ 594,080.00		-		$ 148,520.00		$      297,040.00		$ 445,560.00
	3		$ 445,560.00		-		$ 148,520.00		$      445,560.00		$ 297,040.00
	4		$ 297,040.00		-		$ 148,520.00		$      594,080.00		$ 148,520.00
	5		$ 148,520.00		-		$ 148,520.00		$      742,600.00		$                   -

b)	Double declining balance method
	Rate of Depreciation		100% / 5 years x 2		40%
	End of Annual Period		Beginning of		Depreciation		Depreciation		Accumulated		Book Value
			Period Book Value		Rate		Expense		Depreciation
	1		$ 812,500.00		40%		$ 325,000.00		$      325,000.00		$ 487,500.00
	2		$ 487,500.00		40%		$ 195,000.00		$      520,000.00		$ 292,500.00
	3		$ 292,500.00		40%		$ 117,000.00		$      637,000.00		$ 175,500.00
	4		$ 175,500.00		40%		$    70,200.00		$      707,200.00		$ 105,300.00
	5		$ 105,300.00		40%		$    35,400.00		$      742,600.00		$    69,900.00
	Note:	Since depreciation cannot make the book value of the equipment fall below the residual value decided at the time of purchase,
		depreciation expense for the last year has been charged accordingly.
		Beginning book value at the final year =			$ 105,300.00
		Residual value at the end of final year =			$    69,900.00
		Depreciation needs to be charged =			$ 105,300 - $ 69,900
				=	$    35,400.00

2)	Journal Entries
a)	When the asset is sold for $ 119,000 (Depreciation = Double declining balance method)
	Bank A/c			$ 119,000.00
	Accumulated Depreciation A/c			$ 707,200.00
	To Equipment A/c				$ 812,500.00
	To Profit on sale A/c				$    13,700.00
b)	When the asset is sold for $ 102,100 (Depreciation = Double declining balance method)
	Bank A/c			$ 102,100.00
	Accumulated Depreciation A/c			$ 707,200.00
	Loss on sale A/c			$      3,200.00
	To Equipment A/c				$ 812,500.00