(1)
Depreciation refers to the reduction in the monetary value of a fixed asset due to its wear and tear or obsolescence. It is a method of distributing the cost of the fixed assets over its estimated useful life. The following is the formula to calculate the depreciation.
Partial period depreciation:
Partial period depreciation is calculated when acquisition and disposal occur at different times in a fiscal year, a company must determine the depreciation, depletion, and amortization to record for the part of the year that each asset actually is used.
To calculate: Depreciation expense on the building, machinery, and equipment for 2018.
(1)
Explanation of Solution
Company H uses
Straight line method:
Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset.
Sum-of- the-years’ digits (SYD) method:
Sum-of-the years’ digits method determines the depreciation expense by multiplying the depreciable base and declining fraction.
Where n is estimated life time of the asset.
Depreciation for 2018:
Depreciation on building and machinery:
Asset | Cost of the asset($) |
Residual value ($) |
Rate of depreciation (1) |
Annual depreciation ($) |
Building | 500,000 | 0 | 4% | 20,000 |
Machinery | 240,000 | 24,000 | 12.50% | 27,000 |
Table (1)
Depreciation on equipment is as follows
Building, machinery and equipment are used only for 9 months in 2018 that is April to December then the depreciation for 2018 is as follows
Depreciation on building is $15,000
Working notes:
(1) Calculate the rate of depreciation for building and machinery.
Rate of Depreciation for building
Rate of Depreciation for machinery
*Calculate SYD value
(2)
To prepare: The journal entries to record (1) depreciation on the machinery sold on June 29, 2019, and (2) the sale of machinery.
(2)
Explanation of Solution
(1) Prepare
Date | Account titles and explanation | Post Ref. |
Debit ($) |
Credit ($) |
June 29 2019 |
Depreciation expense (1) | 5,625 | ||
5,625 | ||||
(To record the depreciation entry) |
Table (2)
- Depreciation is an expense which decreases shareholders equity. Thus, it is debited.
- Accumulated depreciation is a contra asset which decreases assets value. Thus, it is credited.
(2) Prepare journal entry to record the sale of machinery.
Date | Account titles and explanation | Post Ref. |
Debit ($) |
Credit ($) |
June 29 2019 |
Cash | 80,000 | ||
Accumulated depreciation-machinery (2) | 14,063 | |||
Loss on sale of machinery (balancing figure) |
5,937 | |||
Machinery | 100,000 | |||
(To record the sale of machinery entry) |
Table (3)
- Cash is a current asset which is increased by sale of asset. Thus, it is debited.
- Accumulated depreciation is a contra asset which is increasing the value of the asset. Thus, it is debited.
- Loss on sale of the asset decreases shareholders equity. Thus, it is debited.
- Machinery is an asset. It is decreased because of sale of the machinery. Thus, it is credited.
Working notes:
(1) Calculate the depreciation expense on machinery.
In 2019, the machinery is used only for 6 months that is January to June then the depreciation for 2019 is as follows
(2) Calculate accumulated depreciation on the machinery sold.
The machinery used for 15 months that is April 2018 to June 2019. Then the accumulated depreciation is calculated as follows:
(3)
To calculate: The depreciation on building, machinery and equipment for 2019.
(3)
Explanation of Solution
Depreciation on building and machinery for 2019
Asset | Cost of the asset($) |
Residual value ($) |
Rate of depreciation (1) |
Annual depreciation ($) |
Building | 500,000 | 0 | 4% | 20,000 |
Machinery | 140,000 | 14,000 | 12.50% | 15,750 |
Table (4)
- Machinery was sold during 2019, $100,000. Remaining machinery value is $140,000 and the residual value on machinery is 10% on the book value.
- Depreciation on building for 2019 is $20,000.
Compute depreciation on equipment for 2019 using sum of the year’s digit method
For first 3 months:
For remaining 9 months:
Deprecation for 2019 is as follows:
Therefore depreciation on equipment for 2019 is $36,750.
In 2019, depreciation on building is $20,000; on machinery is $15,750 and on equipment is $36,750.
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Chapter 11 Solutions
INTERMEDIATE ACCOUNTING (LL) >CUSTOM<
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