Question

Chapter 8 question 1 The Ramirez & Chao Corporation (RCC) purchased a van that cost $62,000, which had an estimated residual value of $8,000 and an estimate useful life of six years. RCC uses straight-line depreciation. What is the net book value of the car at the end of the second year? Show your work. Assume RCC made the following expenditures related to the van at the beginning of the fifth year. As a result of the new transmission ESC extended its estimate of the useful life of the van from a total of six years to a total of eight years and changed the estimate of the residual value to $4,000. • • Routine oil change $80 Replacement of the transmission $4,100 What amount would ESC record as depreciation expense at the end of the fifth year? Show your work. Chapter 8 question 2 Macie and Hira INC. purchased machinery for $60,000 to use in its operations. The machinery has a useful life of 5 years and a salvage/residual value of $2,000 at the end of its useful life. Assume the company sells the asset at the end of year three for $15,000. Prepare the journal entry for the sale assuming the company used the straight-line method of depreciation (show your work).

Answer 1

Question 1:

Net book value of the car at the end of second year = $44000

Solution -

Net book value = cost - accumulated depreciation.

Where,

Depreciable value = cost - salvage value

= $62000 - $8000

= $54000

Accumulated depreciation at the end of second year = depreciation per year × 2.

Depreciation per year = depreciable value / useful life.

= $54000/6 years

= $9000 per year

So accumulated depreciation = $9000 ×2 = $18000

Therefore

Net book value = $62000 - $18000 = $44000.

Depreciation expense at the end of fifth year = $6525.

Solution -

At the beginning of the fifth year, book value = $62000 - ($9000×4)

= $62000 - 36000

= $26000

The expenses to be capitalized = $4100*

So new depreciable value at the beginning of the fifth year = ($26000 + $4100) - $4000

= $30100 - $4000

= $26100

New remain useful life = 8 years - 4 years = 4 years.

New depreciation per year from the end of fifth year = $26100/4 years.

= $6525 per year.

So depreciation expense at the end of fifth year = $6525.

*the expenses which increases the efficiency (useful life or production capacity) of the asset are capitalized. The expenses which are incurred on routine basis are not capitalized. Therefore the routine oil change is not added to asset value.

Question 2:

	Debit	Credit
Cash	$15000
Loss on sale of machinery	$10200**
Accumulated depreciation	$34800
To machinery		$60000
(being machinery sold)

Solution -

Depreciation per = ($60000 - $2000)/5 years = $58000 / 5 years

= $11600 per year.

At the end of the third year , accumulated depreciation = $11600 × 3 years = $34800 .

** gain or (loss) on sale = sale value - book value at the end of third year.

= $15000 - ($60000 - $34800)

= $15000 - $25200

= -$10200.