Intermediate Accounting
Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 11, Problem 11.9P

Straight-line depreciation; disposal; partial period; change in estimate

• LO11–2, LO11–5

The property, plant, and equipment section of the Jasper Company’s December 31, 2017, balance sheet contained the following:

Property, plant, and equipment:    
Land   $120,000
Building $ 840,000  
Less: Accumulated depreciation (200,000) 640,000
Equipment 180,000  
Less: Accumulated depreciation ? ?
Total property, plant, and equipment   ?

The land and building were purchased at the beginning of 2013. Straight-line depreciation is used and a residual value of $40,000 for the building is anticipated.

The equipment is comprised of the following three machines:

Chapter 11, Problem 11.9P, Straight-line depreciation; disposal; partial period; change in estimate  LO112, LO115 The property,

The straight-line method is used to determine depreciation on the equipment. On March 31, 2018, Machine 102 was sold for $52,500. Early in 2018, the useful life of machine 101 was revised to seven years in total, and the residual value was revised to zero.

Required:

1. Calculate the accumulated depreciation on the equipment at December 31, 2017.

2. Prepare the journal entry to record 2018 depreciation on machine 102 up to the date of sale.

3. Prepare a schedule to calculate the gain or loss on the sale of machine 102.

4. Prepare the journal entry for the sale of machine 102.

5. Prepare the 2018 year-end journal entries to record depreciation on the building and equipment.

(1)

Expert Solution
Check Mark
To determine

Depreciation:

The decrease in the value of fixed tangible assets due to its use is known as depreciation. It is the allocation of the cost of tangible fixed assets over the useful life of the asset.

To calculate: The accumulated depreciation on the equipment at December 31, 2017.

Explanation of Solution

Company J using straight line method of depreciation:

Straight-line method: It is a method of providing depreciation. In this method, depreciation is calculated as the fixed percentage of the original cost of the fixed asset. The amount of depreciation in this method remains same for all the years of the useful life of the asset. Therefore, the following formula is used to calculate depreciation of asset.

Depreciation = Cost of the Asset  Residual valueEstimated Useful Life of the Asset

To calculate: The accumulated depreciation on the equipment at December 31, 2017.

Asset

Cost at 2016

($)

Estimated residual value Estimated life of the asset

Number

of years

  used

Accumulated

 depreciation

($)

(1) (2)

(2a)

(3) (4) (5) = [(22a)÷(3)]×(4)
101 70 7000 10years 36 18,900
102 80 8000 8 years 18 13,500
103 30 3000 9 years 4 1,000
Accumulated depreciation on 31, December 2017 33,400

Table (1)

(2)

Expert Solution
Check Mark
To determine

To prepare: The journal entry to record the depreciation machine 102 up to the date of sale.

Explanation of Solution

Prepare a journal entry to record the depreciation on equipment 102.

Accounts title and explanation Post Ref.

Debit

($)

Credit

($)

Depreciation expense (1)   2,250  
       Accumulated Depreciation     2,250
(To record the depreciation on equipment 102.)      

Table (2)

Working note:

(1) Calculate the depreciation on equipment 102 up to the date of sale.

Depreciation = Cost of the Asset  Residual valueEstimated Useful Life of the Asset×Numberofmonths12months=$80,000$8,0008years×312=$72,0008years×312=$2,250

Therefore depreciation up to the date of sale is $2,250.

(3)

Expert Solution
Check Mark
To determine

To prepare: A schedule to calculate the gain or loss on the sale of machine 102.

Explanation of Solution

Prepare a schedule to calculate the gain or loss on sale of machine 102.

Particulars Amount ($) Amount ($) Amount ($)
Sales proceeds     52,500
Less: Book value on 31/03/18      
   Cost   80,000  
Accumulated depreciation   (15,750) 64,250
Loss on sale of equipment 102     11,750

Table (2)

Calculate the accumulated depreciation

Particulars

Amount

$

   Depreciation through 31/12/17 13,500
   Depreciation from 1/1/18 to 31/3/18 2,250
Accumulated depreciation 15,750

Table (3)

(4)

Expert Solution
Check Mark
To determine

To prepare: The journal entry for the sale of machine 102.

Explanation of Solution

Prepare the journal entry for the sale of machine 102.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

31/03/2018 Cash   52,500  
  Accumulated depreciation   15,750  
  Loss on sale of the equipment 102   11,750  
  Equipment 102     80,000
  (To record the sale of equipment 102.)      

Table (4)

  • Cash is a current asset and increased due to sale of equipment 102. Thus, debit Cash account with $52,500.
  • Accumulated depreciation is a contra asset. It increases the value of asset account. Thus, debit Accumulated Depreciation with $15,750.
  • Loss on sale of equipment 102 decreases the value of shareholders equity. Thus, debit Loss on sale of equipment 102 with $11,750.
  • Equipment 102 is an asset and decreases value of the assets due to sale. Thus, credit Equipment 102 with $80,000.

(5)

Expert Solution
Check Mark
To determine

To prepare: The 2018 year-end journal entries to record depreciation on the building and equipment.

Explanation of Solution

Prepare a journal entry to record the depreciation on building.

Date Accounts title and explanation Post Ref.

Debit

($)

Credit

($)

31/12/2018 Depreciation expense  (1)   40,000  
         Accumulated Depreciation – Building     40,000
  (To record the depreciation.)      

Table (5)

  • Depreciation is an expense which decreases shareholders equity. Thus, debit Depreciation expense account with $40,000.
  • Accumulated depreciation is a contra asset. It decreases the value of asset. Thus, credit accumulated depreciation with $40,000.

Working notes:

Determine the depreciation per year.

 The land and building were purchased at the beginning of 2013. Straight-line depreciation is used and a residual value of $40,000 for the building is anticipated.

Accumulateddepreciation = Depreciation per year ×Number of years $200,000=  Depreciation per year×5yearsDepreciation per year = $200,0005years = $40,000

Therefore annual depreciation on building is $40,000.

Prepare a journal entry to record the depreciation on equipment.

Date Accounts title and explanation Post Ref.

Debit

($)

Credit

($)

  Depreciation expense  (2)   15,775  
         Accumulated Depreciation     15,775
  (To record the depreciation.)      

Table (6)

  • Depreciation expense which decreases shareholders equity. Thus, debit Depreciation expense with $15,775.
  • Accumulated depreciation is a contra asset. It decreases the value of asset. Thus, credit accumulated depreciation with $15,775.

Working note:

Compute the deprecation on equipments.

Particulars

Amount

($)

Amount

($)

Equipment  101    
Cost 70,000  
Less: Accumulated depreciation 18,900  
  Book value, 12/31/17 51,100  
Revised remaining life (7 years – 3 years) ÷ 4 years 12,775
Equipment  103 (requirement 1)   3,000
Depreciation   15,7775

Table (7)

Therefore depreciation on equipment’s is $15,775.

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