Question

PROBLEM 6: 20 POINTS Grayson's Lumber Mill sold two machines in 2020. The following information pertains to the two machines: Purchase Useful Salvage Value Depreciation Sales Machine Cost $66.000 $50,000 Date Sold Date Life Method Price #1 5 yrs. 5 yrs. 7/1/16 $6,000 Straight-line Double-declining- $15,000 $30,000 7/1/20 # 2 $5,000 7/1/19 12/31/20 balance Instructions Compute the depreciation on each machine to the date of disposal. (a) Prepare the journal entries in 2020 to record 2020 depreciation and the sale of each machine. (b)

Answer 1

a)

Machine #1 - Straight line method:

Depreciation Expense = (Cost of the machine - Salvage Value) / Number of years of useful life of the machine

= ($66,000 - $6,000) / 5 years

= $60,000 / 5 years

= $12,000

Depreciation expense under straight-line method is always equal in each year of the life of that asset, hence, each year, the depreciation expense is $12,000 for machine #1.

For 2016:

Used for 6 months (from July) so half year depreciation is $6,000 ($12,000*6/12 months).

Depreciation on the date of disposal is $48,000 ($6,000 + $12,000*3 years + $6,000) because the machine #1 is purchased on July 1st 2016 so half year depreciation in 2016 and full depreciation of $12,000 in 2017, 2018 & 2019 but half year depreciation of $6,000 in 2020 because it is sold on July 1st 2020 so depreciation is calculated from 2016 to June 2020 that comes total 4 years.

Machine #2 - Double declining balance method:

Depreciation Expense = Cost of the asset / Number of years of useful life of the machine * 2

2019:

Depreciation Expense = $50,000 / 5 years * 2

= $20,000

Therefore, depreciation for 2016 under double-declining balance method for machine #2 is $20,000 but it is purchased on July 2019 so only half year depreciation is charged so depreciation for machine #2 is $10,000 ($20,000*6/100).

2020:

Depreciation Expense = Cost of the asset - total depreciation charged / Number of years of useful life of the machine * 2

= ($50,000 - $10,000) / 5 years * 2

= $16,000

Therefore, depreciation for 2017 under double-declining balance method for machine #2 is $16,000.

Total depreciation charged from 2019 to 2020 is $26,000 ($10,000 + $16,000) for machine #2 under double declining balance method because this machine is used half year in 2019.

b)

Journal Entries:

Journal entries relating to Depreciation
Date	Account Titles and Explanations	Debit	Credit
Jul. 1, 2020	Depreciation Expense	$6,000
	Accumulated Depreciation - machine #1		$6,000
	(To record the depreciation for 6 months in 2020)
Dec. 31, 2020	Depreciation Expense	$16,000
	Accumulated Depreciation - machine #2		$16,000
	(To record the depreciation for 12 months in 2020)
Journal entries relating to sale of two machines
	Account Titles and Explanations	Debit	Credit
Jul. 1, 2020	Cash	$15,000
	Accumulated Depreciation - Machine #1	$48,000
	Loss on same of machine #1 ($66,000 - $48,000 - $15,000)	$3,000
	Machine #1		$66,000
	(To record the sale of machine #1 with loss)
Dec. 31, 2020	Cash	$30,000
	Accumulated Depreciation - Machine #2	$26,000
	Machine #2		$50,000
	Gain on sale of Machine #2 ($30,000+$26,000-$50,000)		$6,000