Question

Sabel Co. purchased assembly equipment for $836,000 on January 1, 2018. Sabel’s financial condition immediately prior to the purchase is shown in the following horizontal statements model.

The equipment is expected to have a useful life of 380,000 miles and a salvage value of $38,000. Actual mileage was as follows:

2018	74,000
2019	79,000
2020	60,000
2021	54,000
2022	28,000

Required

1. Compute the depreciation for each of the five years, assuming the use of units-of-production depreciation.
2. Assume that Sabel earns $248,000 of cash revenue during 2018. Record the purchase of the equipment and the recognition of the revenue and the depreciation expense for the first year in a financial statements model like the preceding one. The first event is recorded as an example.
3. Assume that Sabel sold the equipment at the end of the fifth year for $40,400. Calculate the amount of gain or loss on the sale.

Answer:

A-

	Years Depreciation 2018 2019 2020 2021 2022

B.

C.

Assume that Sabel sold the equipment at the end of the fifth year for $40,400. Calculate the amount of gain or loss on the sale.

Answer 1

Depriciation charge per year = (purchase cost of equipment - salvage value)*Actual mileage/useful life of 38000 miles

where purchase cost $ 836000 & estimated salvage value $38000

a. Computation of depreciation for each of the five year -

year	Milage	Calculation	Dep./year
2018	74000	(836000-38000)*74000/380000	155400
2019	79000	(836000-38000)*79000/380000	165900
2020	60000	(836000-38000)*60000/380000	126000
2021	54000	(836000-38000)*54000/380000	113400
2022	28000	(836000-38000)*28000/380000	58800
	295000		619500

(b) Journal Entries of revenue recognised, depreciation & equipment purchased -

Journal	Dr	Cr
Equipment A/c	836000
To Accounts payable		836000
(equipment purchased)
Cash A/c	248000
To Service revenue		248000
(Revenue recognition)
Depriciation A/c	155400
To equipment		155400
(Depriciation recorded)

C. Calculation of the amount of gain or loss on the sale -

Book value of the equipment at the end of 5th year = purchase cost - depreciation of 5 years

= 836000 - 619500

= 216500

Sale value of equipment at the end of 5th year = 40400

Gain /(loss) on sale of equipment = Sale value of equipment - book value of equipment at the end of 5th year

= 40400 - 216500

= -176100 or (176100)

Please check with your answer and let me know.