Question

Assume that TarMart purchased equipment at the beginning of fiscal year 2016 for $480,000 cash.  The equipment had an estimated useful life of 8 years and a residual value of $30,000.  

            

1.         What would depreciation expense be for year 3 under the straight-line method?

2.         What would depreciation expense be for year 3 under the double-declining balance method?

3.         What is the first year in which depreciation expense under the straight-line method is higher than under the declining balance method?

            

4.         Assume TarMart uses the straight-line depreciation method for its equipment.  Also assume that at fiscal year-end 2020, TarMart sold the equipment purchased at the beginning of fiscal year 2016 for $200,000 cash.  Prepare the journal entry to record the sale of the equipment at year-end 2020.

Answer 1

1. Depreciation under straightline method = (Purchase price - Residual value) Usefull life

= (480000 - 30000) 8 = 56250 per year

Depreciation will be same in all the years under straighline method.

Year 3 depreciation under straightline method = 56250

2. Depreciation under double declining balance method = Depreciable base Double declining percentage

Double declining percentage = Straightline percentage 2

Straightline percentage = 1 8 = 0.125

Double declining percentage = 0.125 2 = 0.25 = 25%

Residual value will not be considered under declining and double declining balance method

Depreciation schedule

1st year = 480000 25% = 120000

2nd year = 360000 25% = 90000

3rd year = 270000 25% = 67500   

4th year = 202500 25% = 50625

2nd year depreciation base = book vlaue - 1st year dereciation. This pattern repeats in the following years too.

Year 3 depreciation under double declining balance method = 67500

3. Year in which depreciation expense under the straight-line method exceeds double declining balance method is year 4.

Year 4 depreciation under straightline method = 56250

Year 4 depreciation under double declining balance method = 50625

Depreciation under straightline method remains the same through out asset's usefulll life. Depreciation under declining balance method will be higher in the initial years and decreases gradually when years passes.

4.  The machine is sold at the end of 2020 which was purchased at the beginning of 2016. So the machine will be accounted for 5 year depreciation as 2016, 2017, 2018, 2019 and  2020 years.

Accumulated depreciation for 5 years = 56250 5 = 281250

Book value at the end of 2020 = 480000 - 281250 = 198750

Machine is sold for 200000, so profit on sale = 1250

The journal entry for the sale of machinery is

Cash a/c Dr, 200000

To machinery     198750

   To P&L 1250