Question

Depreciation by Two Methods; Sale of Fixed Asset New tire retreading equipment, acquired at a cost of $140,000 at the beginning of a fiscal year, has an estimated useful life of four years and an estimated residual value of $10,000. 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 manager, the double-declining-balance method was selected In the first week of the fourth year, the equipment was sold for $23,300. Instructions: 1a. 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 straight-line method Straight-Line Method Year Depreciation Expense Accumulated Depreciation, End of Year Book Value, End of Year 2 4 1b. 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 double-declining-balance method. Double-Declining-Balance Method Year Depreciation Expense Accumulated Depreciation, End of Year Book Value, End of Year 2 4 2. Illustrate the effects on the accounts and financial statements of the sale. Assume the double-declining-balance method of depreciation is used If no account or activity is affected, select "No effect" from the dropdown list and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts

Answer 1

1a.
Formula to calculate depreciation using straight line depreciation
Straight Line Depreciation = (Cost - Residual)/Number of useful life
Straight Line Depreciation = (140,000 - 10,000)/4
Straight Line Depreciation = 32,500
Depreciation for each of the year would be $32,500
Straight Line method
Year	Depreciation Expense	Accumulated depreciation, end of year	Book Value, End of year (Cost - accumulated depreciation)
1	$32,500	$32,500	$107,500
2	$32,500	$65,000	$75,000
3	$32,500	$97,500	$42,500
4	$32,500	$130,000	$10,000
1b.
Formula to calculate depreciation rate under double declining method
Double declining depreciation rate = 2*(1/4)
Double declining depreciation rate = 2*0.25
Double declining depreciation rate = 50%
Double Declining Balance Method
Year	Depreciation Expense (Book Value*Depreciation rate)	Accumulated depreciation, end of year	Book Value, End of year (Cost - accumulated depreciation)
			$130,000
1	$65,000	$65,000	$75,000
2	$37,500	$102,500	$37,500
3	$18,750	$121,250	$18,750
4	$8,750	$130,000	$10,000
2. Financial statement effect for sale of asset
Statement of cash flows	Balance Sheet
	Assets				=	Liabilities	+	Stockholders Equity	Income statement
	Cash	Equipment	-	Accumulated Depreciation - Equipment	=	No Effect		Retained earnings
	$23,300	-$140,000		$121,250				$4,550
Statement of cash flows								Statement of cash flows
Investing	$23,300							Gain on disposal of equipment	$4,550
									23300 - (140000-121250)
3. Financial statement effect for sale of asset
Statement of cash flows	Balance Sheet
	Assets				=	Liabilities	+	Stockholders Equity	Income statement
	Cash	Equipment	-	Accumulated Depreciation - Equipment	=	No Effect		Retained earnings
	$15,250	-$140,000		$121,250				-$3,500
Statement of cash flows								Statement of cash flows
Investing	$15,250							Loss on disposal of equipment	-$3,500
									15250 - (140000-121250)