Question

Depreciation by Two Methods; Sale of Fixed Asset

New lithographic equipment, acquired at a cost of $625,000 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 $53,700. 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 $91,500.

Required:

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 the following methods:

a. Straight-line method

Year	Depreciation Expense	Accumulated Depreciation, End of Year	Book Value, End of Year
1	$	$	$
2	$	$	$
3	$	$	$
4	$	$	$
5	$	$	$

b. Double-declining-balance method

Year	Depreciation Expense	Accumulated Depreciation, End of Year	Book Value, End of Year
1	$	$	$
2	$	$	$
3	$	$	$
4	$	$	$
5	$	$	$

2. Journalize the entry to record the sale assuming that the manager chose the double declining-balance method. If an amount box does not require an entry, leave it blank.

3. Journalize the entry to record the sale in (2) assuming that the equipment was sold for $78,600 instead of $91,500. If an amount box does not require an entry, leave it blank.

Answer 1

a. Straight-line method

Year	Depreciation Expense	Accumulated Depreciation, End of Year	Book Value, End of Year
1	$114260	$             114,260	$             510,740
2	$114260	$             228,520	$             396,480
3	$114260	$             342,780	$             282,220
4	$114260	$             457,040	$             167,960
5	$114260	$             571,300	$               53,700

Depreciation per year = (Original cost – Residual value)/Useful life

             = ($625000 - $53700)/5 years = $114260

b. Double-declining-balance method

Year	Depreciation Expense	Accumulated Depreciation, End of Year	Book Value, End of Year
1	($625000 * 40%) =$250000	$250000	($625000 - $250000) =$375000
2	($375000 * 40%) =$150000	$400000	$225000
3	($225000 * 40%) =$90000	$490000	$135000
4	($135000 * 40%) =$54000	$544000	$81000
5	$81000	$571300	$53700

Rate of Dep under DDB method = (1/Life)*2

            = (1/5) * 2 = 40%

2. Journalize the entry to record the sale, assuming double-declining balance method is used. If an amount box does not require an entry, leave it blank.

	Cash	$91500
	Accumulated Depreciation-Equipment	$544000
	Equipment		$625000
	Gain on Sale of Equipment		$10500

3. Journalize the entry to record the sale in (2), assuming that the equipment was sold for $78,600 instead of $91,500. If an amount box does not require an entry, leave it blank.

	Cash	$78600
	Accumulated Depreciation-Equipment	$544000
	Loss on Sale of Equipment	$2400
	Equipment		$625000