Question

7. New Heights Aviation purchased on January 1, 2020 a plane for $ 500,000. The plane is expected to have a 20 year life after which it can be sold for $ 100,000. Required: a. Compute depreciation expense for first three years using straight line. b. Compute depreciation expense for the first three years using double-diminishing balance method. C. At the end of three years the plane is sold for $400,000. Prepare journal entry to record the sale assuming depreciation was recorded using straight line.

Answer 1

a) Computation of depreciation expense for first three years using straight line -Year (Cost less salvage value) Depreciation Useful life of machinery 400000 400000 400000 20000 20000 20000 The Depreciation expense will be same for all the years as in the straight line method depreciation is same for all the years. 2 b) Computation of depreciation expense for the first three years using double diminishing balance method 4 Computation of rate of depreciation = 1/useful life UI 5 Computation of rate of depreciation = 1/20 = 5% 3 Rate of depreciation in case of double diminishing balance method = 5% * 2 = 10% Year Book value at the beginning of the year Depreciation expense i.e. 10% Book value at the end of the year 500000 50000 450000 450000 45000 405000 405000 40500 364500 om

c) Book Value after 3 years = 500000- 20000*3) Value after 3 years = 500000-60000 = 440000 Journal Entry after 3 years General Journal Debit Credit Bank Provision for Depreciation Loss on sale of Plane Plane (Asset) (Being Entry made) 4,00,000 60,000 40,000 5,00,000