Question

Depreciation by Two Methods; Sale of Fixed Asset New tire retreading equipment, acquired at a cost of $843,750 on September 1 at the beginning of a fiscal year, has an estimated useful life of five years and an estimated residual value of $72,000. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year. On the basis of the data presented to the maraer, the double-dedining-balance method was selected. In the first week of the fifth year, on September 6, the equipment was sold for $123,600 Required: 1. Determine the annual depreciation expense for each of the estimated four 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 Depreciation Accumulated Depreciation, Book Value, Expense End of Year End of Year Year 1 2 3 $ 5 b. Double-declining-balance method Book Value End of Year Depreciation Expense Accumulated Depreciation, End of Year Year 1 2 Previous

Answer 1

Answer to 1.

a. straight Line Method
Year	Depreciation Expense	Accumulated depreciation, End of Year	Book Value, End of Year
1	154,230	154,230	689,520
2	154,230	308,460	535,290
3	154,230	462,690	381,060
4	154,230	616,920	226,830
5	154,230	771,150	72,600

working:

Cost	843,750
Less: residual Value	72,600
Depreciable value	771,150
Life	5 Years
Annual Depreciation	154,230

b. Double decline balance Method - 40%
Year	Depreciation Expense	Accumulated depreciation, End of Year	Book Value, End of Year
1	337,500	337,500	506,250
2	202,500	540,000	303,750
3	121,500	661,500	182,250
4	72,900	734,400	109,350
5	43,740	778,140	65,610

Working: In double decline method depreciation rate will be double of straight line. It means assets of life 5 normal straight line depreciation is 20% so double decline is 40% on Reducing balance.

Answer to 2.

	Debit	Credit
Cash	123,600
Accumulated Depreciation	734,400
Profit on sale of equipment		14,250
Equipment		843,750

Answer to 3.

	Debit	Credit
Cash	106,100
Accumulated Depreciation	734,400
Loss on sale of equipment	3,250
Equipment		843,750