Question

On September 6, 2017, East River Tug Co. purchased a new tugboat for $400,000. The estimated life of the boat was 20 years, with an estimated residual value of $40,000.

Compute the depreciation on this tugboat in 2017 and 2018 using the following methods. Apply the half-year convention. (If necessary, round to the nearest dollar.)

	2017	2018
(a) Straight-line	$________	$________
(b) 200%-declining-balance	$________	$________
(c) 150%-declining-balance	$________	$________

Show work:

18(b)

On March 1, 2018, five-year bonds are sold for $520,000 that have a face value of $500,000 and an interest rate of 10%. Interest is paid semi-annually on March 1 and September 1. Using the straight-line amortization method, prepare the borrower's journal entries on:

March 1, 2018; September 1, 2018; December 31, 2018; and March 1, 2019.

Show work:

3/1/18
9/1/18
12/31/18
3/1/19

Answer 1

Computation of Depreciation on Tugboat for the year 2017 and 2018:

a) Straight line method:

Depreciation = (Original cost of asset - salvage value) / Estimated life of years

= ($ 400,000 - 40,000) / 20

= $ 18,000

Depreciation for full year is $ 18,000, Depreciation for half year will be $ 9,000 ($ 18,000 / 2)

Hence, Depreciation for year 2017 will be $ 9,000 and for year 2018 will be $ 18,000.

b) 200% Declining balance method:

As per double declining method , depreciation will calculated as follows:

Depreciation rate = 100% / 20 years 2 = 10%

Depreciation rate for year 2017 will be 10% / 2 = 5%

  

   Hence, Depreciation for year 2017 is $ 20,000 ($ 400,000 5%) and for year 2018 is $ 38,000 ($ 400,000 - 20,000 10%)

c) 150% Declining balance method:

As per double declining method , depreciation will calculated as follows:

Depreciation rate = 100% / 20 years 1.5 = 7.5%

Depreciation rate for year 2017 will be 7.5% / 2 = 3.75%

Hence, Depreciation for year 2017 is $ 15,000 ($ 400,000 3.75%) and for year 2018 is $ 28,875 ($ 400,000 - 15,000 7.5%)

	2017	2018
a) Straight line method	$ 9,000	$ 18,000
b) 200% Declining- balance	$ 20,000	$ 38,000
c) 150% Declining- balance	$ 15,000	$ 28,875

18(b)

Premium on bonds payable = Sale value - Face value

=  $ 520,000 - 500,000 = $ 20,000

Amortization of premium using straight line method will be done semiannually for 5 years = $ 20,000 / 10 = $ 2,000

Interest payable semiannually will be = $ 500,000 10% / 2 = $ 25,000.

Journal Entries using straight line method of amortization:

3/1/18	Cash	$ 520,000
	Bonds Payable		$ 500,000
	Premium on Bonds payable		$ 20,000
	(Issue of Bonds at Premium for cash)
9/1/18	Interest Expense	$ 23,000
	Premium on Bonds	$ 2,000
	Cash		$ 25,000
	( Being interest paid and amortization of premium semiannually)
31/12/18	Interest Expense	$ 23,000
	Accrued Interest Payable		$ 23,000
	( to record accrued interest payable at year end)
3/1/18	Interest Expense	$ 23,000
	Premium on Bonds payable	$ 2,000
	Cash		$25,000
	( Being interest paid and amortization of premium semiannually)