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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Depreciation by two methods; sale of fixed asset

New lithographic equipment, acquired at a cost of $800,000 on March 1 of Year 1 (beginning of the fiscal year), has an estimated useful life of five years and an estimated residual value of $90,000. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year.

On March 4 of Year 5, the equipment was sold for $135,000.

Instructions

1.    Determine the annual depreciation expense for each of the estimated five 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 (a) the straight-line method and (b) the double-declining-balance method. The following columnar headings are suggested for each schedule:

Year Depreciation Expense Accumulated Depreciation, End of Year Book Value, End of Year

2.    Journalize the entry to record the sale assuming that the manager chose the double-declining-balance method.

3.    Journalize the entry to record the sale in (2) assuming that the equipment was sold for $88,750 instead of $135,000.

1. (a)

To determine

Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

Depreciation = (Cost of the assetResidual value)Estimated useful life of the asset

To determine: the annual depreciation expense, accumulated depreciation, and the book value for each of the estimated five years of use by the straight-line method.

Explanation

Determine the annual depreciation expense, accumulated depreciation, and the book value by straight-line method.

Year Depreciation Expense (1) Accumulated Depreciation, End of Year Book Value, End of Year
Year 1 $142,000 $142,000 $658,000
Year 2 $142,000 $284,000 $516,000
Year 3 $142,000 $426,000 $374,000
Year 4 $142,000 $568,000 $232,000
Year 5 $142,000 $710,000 $90,000

Table (1)

Working notes:

Cost of the equipment= $800,000

Estimated residual value =$90,000

Estimated Useful Life =5 years

Depreciation 

2.

To determine

To journalize: the entry to record the sale of equipment for $135,000 under the double-declining-balance method.

3.

To determine

To journalize: the entry to record the sale of equipment for $88,750 under the double-declining-balance method.

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