Chapter 11, Problem 17P

1.

To determine

Calculate the accumulated depreciation balance at December 31, 2016 for the given assets, and check its accuracy.

Explanation of Solution

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

Sum-of- the-years’ digits method: Sum-of-the years’ digits method determines the depreciation by multiplying the depreciable base and declining fraction.

Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life is referred to as double-declining-balance method.

Calculate the accumulated depreciation balance at December 31, 2016 for the given assets, and cross check its’ accuracy as follows:

Building:

$\begin{array}{c}\text{Accumulated depreciation = }\left(\begin{array}{l}\text{Annual depreciation expense}\times \\ \text{Number of years from 2014 to 2016}\end{array}\right)\\ =\$1,250(1)\times 3\text{ years}\\ \text{=\$3,750}\end{array}$

Office machinery:

Year	Beginning book value (A)	Depreciation rate (2) (B)	Depreciation expense $\text{C = A}\times \text{B}$	Ending book value $\text{D =}\text{A}-\text{C}$
2014	20,000	20%	4,000	16,000
2015	16,000	20%	3,200	12,800
2016	12,800	20%	2,560	10,240
Total			9,760

Table (1)

Note: Ending book value of the prior year is considered as the beginning book value of current year.

Office fixtures:

Year	Depreciation base (3) (A)	Faction (4) (B)	Depreciation expense $\text{C = A}\times \text{B}$	Ending book value $\text{D =}\text{A}-\text{C}$
2014	25,000	$\frac{5}{15}$	8,333	21,667
2015	25,000	$\frac{4}{15}$	6,667	15,000
2016	25,000	$\frac{3}{15}$	5,000	10,000
Total			20,000

Table (2)

Working note (1):

Calculate the annual depreciation expense of building.

$\begin{array}{c}\text{Depreciation expense = }\frac{\text{Cost of acquisation }-\text{Residual value}}{\text{Estimated useful life}}\\ =\frac{\$50,000-\$0}{\text{40 years}}\\ =\$1,250\text{ per year}\end{array}$

Working note (2):

Compute the depreciation rate:

Useful life = 10 years

$\begin{array}{c}\text{Depreciation rate}=\frac{\text{100\%}}{\text{10 years}}\times 2\\ =20\%\end{array}$

Working note (3):

Calculate the depreciable base of office fixtures.

$\begin{array}{c}\text{Depreciable base = Purchase price –Residual value }\\ \text{= \$30,000–\$5,000}\\ \text{=\$25,000}\end{array}$

Working note (4):

Calculate the denominator of the fraction for sum-of-the-year’s digit.

$\begin{array}{c}\text{Sum-of-the-digits = }\frac{\text{n}\times \left(\text{n}+1\right)}{2}\\ =\frac{5\times \left(5+1\right)}{2}\\ =\frac{5\times 6}{2}\\ =15\end{array}$

2.

To determine

Prepare necessary journal entries for the given transaction for 2017.

Explanation of Solution

Prepare necessary journal entries for the given transaction for 2017 as follows:

Date	Account Title & Explanation	Debit ($)	Credit ($)
January 3, 2017	Building	30,000
	Cash		30,000
	(To record the purchase of building for cash)
March 8, 2017	Cash	3,000
	Accumulate depreciation-Office machinery	1,952
	Office machinery		4,000
	Gain on disposal of office machinery (5)		952
	(To record a piece of office machinery sold during the year)
May 17, 2017	Office fixtures (6)	5,640
	Office machinery (6)	3,760
	Repair expense	230
	Cash $\left(\$9,400+\$230\right)$		9,630
	(To record office fixtures and machinery purchased during the year)
August 10, 2017	Depreciation expense (7)	67
	Accumulated depreciation-Office fixtures		67
	(To record the depreciation expense incurred for office fixtures)
August 10, 2017	Office fixtures	900
	Accumulated depreciation-Office fixtures (7)	467
	Cash		700
	Office fixtures		600
	Gain on disposal of office fixtures (8)		67
	(To record the office fixtures exchanged during the year )
October 20, 2017	Repair expense	125
	Cash		125
	(To record the repair expense incurred during the year)
December 31, 2017	Depreciation expense – Building (9)	2,061
	Depreciation expense - Office machinery (14)	2,390
	Depreciation expense - Office fixtures (17)	5,064
	Accumulated depreciation-Building		2,061
	Accumulated depreciation-Office machinery		2,390
	Accumulated depreciation-Office fixtures		5,064
	(To record the depreciation expense of assets incurred at the end of the accounting year)

Table (3)

Working note (5):

Calculate the gain on disposal of office machinery.

$\begin{array}{c}\text{Gain on sale of office machinery = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Cash +}\\ \text{ Accumulated depreciation}\end{array}\right)-\\ \text{Office machinery}\end{array}\right]\\ =\left(\$3,000+\$1,952\right)-\$4,000\\ =\$952\end{array}$

Working note (6):

Calculate the cost of office fixtures and office machinery.

Particulars	Appraisal value (A)	Total appraisal value (B)	Proportion $\text{C}=\left(\frac{\text{A}}{\text{B}}\times 100\right)$	Total purchase cost (D)	Cost ($) $\text{E = C×D}$
Office fixtures	$6,000	$10,000	60%	$9,400 $\left(\begin{array}{l}\$9,200+\\ \$400\end{array}\right)$	$5,640
Office machinery	$4,000	10,000	40%	$9,400$\left(\begin{array}{l}\$9,200+\\ \$400\end{array}\right)$	$3,760
Total	$10,000		100%		$9,400

Table (4)

Working note (7):

Calculate the depreciation expense of desk.

Year	Depreciation base $\left(\$600-\$100\right)$(A)	Faction (4) (B)	Depreciation expense $\text{C = A}\times \text{B}$
2014	500	$\frac{5}{15}$	167
2015	500	$\frac{4}{15}$	133
2016	500	$\frac{3}{15}$	100
2017	500	$\frac{2}{15}$	67
Total			467

Table (5)

Working note (8):

Calculate the gain on disposal of desk.

$\begin{array}{c}\text{Gain on sale of office machinery = }\left[\begin{array}{l}\left(\begin{array}{l}\text{New desk value +}\\ \text{ Accumulated depreciation}\end{array}\right)-\\ \left(\text{Cash + Office fixtures}\right)\end{array}\right]\\ =\left(\$900+\$467\right)-\left(\$700+\$600\right)\\ =\$1,367-1,300\\ =\$67\end{array}$

Working note (9):

Calculate the depreciation expense of building at the end of the year 2017.

$\begin{array}{c}\text{Depreciation expense = }\frac{\left[\begin{array}{l}\left(\begin{array}{l}\text{Cost of building}-\\ \text{Residual value}\end{array}\right)+\\ \left(\begin{array}{l}\text{Cost of building purchased}\\ \text{ during the year}\end{array}\right)\end{array}\right]}{\text{Remaining useful life}}\\ =\frac{\left(\$50,000-\$3,750\right)+\$30,000}{\text{40 years}-\text{3 years}}\\ =\frac{\$76,250}{37}\\ =\$2,061\end{array}$

Working note (10):

Calculate the remaining office machinery at 2017.

$\begin{array}{c}\text{Remaining machinery = Office machinery at 2014}-\text{Sold on 2017}\\ \text{=\$20,000}-\$4,000\\ =\$16,000\end{array}$

Working note (11):

Calculate the depreciation expense of office machinery at the end of the year 2017.

$\begin{array}{c}\text{Depreication expense balance = }\left(\begin{array}{l}\text{Depreciatione expense on 2016}-\\ \text{Depreciation expense of sold machinery}\end{array}\right)\\ =\$9,760-\$1,952\\ =\$7,808\end{array}$

Working note (12):

Calculate the depreciation expense for remaining office machinery under double declining balance method.

$\begin{array}{c}\begin{array}{l}\text{Depreciation expense }\\ \text{for remainging office machinery}\end{array}\}=\left(\begin{array}{l}\text{Remaining office machinery}-\\ \text{Depreciation expense as of 2017}\end{array}\right)\times \text{Depreciation rate}\\ \text{=}\left[\text{\$16,000}\text{(10)}-\$7,808(11)\right]\times \frac{20}{100}(2)\\ =\$1,638\end{array}$

Working note (13):

Calculate depreciation expense of office machinery purchased during 2017 under double declining balance method.

$\begin{array}{c}\begin{array}{l}\text{Depreciation expense }\\ \text{for purchased office machinery}\end{array}\}=\text{Cost of office machinery}\times \text{Depreciation rate}\\ \text{=\$3,760 (6) }\times \frac{20}{100}(2)\\ =\$752\end{array}$

Working note (14):

Calculate total depreciation expense of office machinery at 2017.

$\begin{array}{c}\text{Depreciation expense =}\left[\begin{array}{l}\text{ Depreciation expense for remaining office machinery+}\\ \text{Depreciation expense for new machinery}\end{array}\right]\\ =\$1,638(12)+\$752(13)\\ =\$2,390\end{array}$

Working note (15):

Calculate the depreciation expense of remaining office fixtures under the sum of the year’s digit method.

$\begin{array}{c}\text{Depreciation expense =}\left[\begin{array}{l}\left(\begin{array}{l}\text{Office machinery on 2014}-\\ \text{Residual value}\end{array}\right)-\\ \left(\begin{array}{l}\text{Cost of sold fixtures}-\\ \text{Residual value}\end{array}\right)\end{array}\right]\times \text{Fraction}\\ \text{=}\left(\$30,000-\$5,000\right)-\left(\$600-\$100\right)\times \frac{2}{15}\\ =\$25,000-\$500\times \frac{2}{15}\\ =\$3,267\end{array}$

Working note (16):

Calculate the depreciation expense of new office fixtures under the sum of the year’s digit method.

$\begin{array}{c}\text{Depreciation expense = }\left(\begin{array}{l}\text{Cost of office machinery}-\\ \text{Residual value}\end{array}\right)\times \text{Fraction}\\ \text{=}\left(\text{\$5,640}-\$250\right)\times \frac{5}{15}\\ =\$1,797\end{array}$

Working note (17):

Calculate the total depreciation expense for office fixtures.

$\begin{array}{c}\text{Depreciation expense = }\left(\begin{array}{l}\text{Depreciation expense for remaining office fixtures+}\\ \text{Depreciation expense of new office fixtures}\end{array}\right)\\ =\$3,267(14)+\$1,797(15)\\ =\$5,064\end{array}$

3.

To determine

Prepare T-account for the accumulated depreciation, and calculate the ending balance of accumulated depreciation for the given assets.

Explanation of Solution

Prepare T-account for the accumulated depreciation, and calculate the ending balance of accumulated depreciation as follows:

Accumulated depreciation - Building
		December 31, 2016	3,750
		December 31, 2016	$2,061
		Clos. Bal.	$5,811

Accumulated depreciation – Office machinery
July 3, 2017	$1,952	December 31, 2016	9,760
		December 31, 2016	$2,390
		Clos. Bal.	$10,198
Accumulated depreciation – Office mixtures
October 8, 2017	467	December 31, 2016	$20,000
		October 8, 2017	$67
		December 31, 2016	$5,064
		Clos. Bal.	$24,664