Question

1. The Cromwell Company sold equipment for $35,000. The equipment, which originally cost $100,000 and had an estimated useful life of 10 years and no salvage value, was depreciated for five years using the straight-line method. What is the gain or loss on the sale? the correct answer is $15,000
2. Weston Company purchased a tooling machine on January 3, 2007 for $1,000,000.The machine was being depreciated on the straight-line method over an estimated useful life of 10 years, with no salvage value. At the beginning of 2014, the company paid $250,000 to overhaul the machine. As a result of this improvement, the company estimated that the useful life of the machine would be extended an additional 5 years (15 years total). What should be the depreciation expense recorded for the machine in 2014? the correct answer is $68,750

Answer 1

1. Cromwell Company using Straight line Method:-

Cost of Equipment=$100,000

Estimated useful Life of Equipment=10years

Straight Line Depreciation Method=(Cost of Equipment - Salvage Value)/Useful life of Equipment

=$(100,000-0)/10years

=$10,000

Depreciation Expense for per year is $10,000.

Equipment used for 5 years and Sold for $35,000.

So the Accumulated Depreciation on Equipment=$(10,000×5years)=$50,000

Journal Entry for the Sale of Equipment:-

Accounts	Debit	Credit
Cash	$35,000
Accumulated Depreciation	$50,000
Loss on Sale of Equipment	$15,000
Equipment		$100,000
(To record sale of Equipment on loss)

So There is a Loss of $15,000 on sale of Equipment.

2. Weston Company also using Straight Line Method:-

Cost of Machine=$1,000,000

Estimated useful life=10 years

Straight Line Depreciation Method=(Cost of Machine - Salvage Value)/Useful Life

=($1,000,000-0)/10 years

=$100,000

So the Depreciation for per year is $100,000.

At the Beginning of 2014 Company Overhaul the Machine of $250,000.

Before Overhaul Machine used for 7 years ( from 2007 to 2013)

Before the Overhaul:-

Value Of Machine=(Cost of Machine - Accumulated Depreciation of 7years)

=($1,000,000-7years×$100,000)

=($1,000,000-700,000)

=$300,000

After the Overhaul:-

Value Of Machine=($300,000+$250,000)

=$550,000

Now Machine estimated useful life would be extended an additional 5years. So the total estimated useful life of Machine would be 15 years (10years+5years). From which 7years Machine already used. So the estimated useful life of Machine would be left 8years (15 years - 7years).

So Revised Depreciation on Machine is:-

Straight Line Depreciation Method=(Cost of Machine - Salvage Value)/Estimated Useful Life

=($550,000-0)/8 years

=$68,750

Depreciation Expense should be recorded for the Machine in 2014 is $68,750.