Question

• On 1/1/20X1, Illini acquires equipment for $100,000 with an expected life of 10 years and an expected residual value of $7,000. Illini also spends $10,000 customizing the equipment to increase its efficiency. Illini elects the double declining balance method to account for the equipment. The annual maintenance for the equipment routinely performed in December costs Illini $2,000 in 20X1.
• On 1/1/20X2, Illini decides that it is more appropriate to use the straight line method to account for the equipment. On 6/31/20X2, Illini sells the equipment for $80,000. Hint: ignore the maintenance that has not been performed for 20X2.

Project 1.4 Part 2 Balance Sheet

Date	Account Name		Debit	Credit
1/1/20X1	Equipment		[A]
		Cash		[B]
1/1/20X1 customization:	Equipment		[C]
		Cash		[D]
12/31/20X1	Depreciation expense		[E]
		Accumulated depreciation-Equipment		[F]
12/31/20X1	Maintenance expense		[G]
		Cash		[H]
6/31/20X2	Depreciation expense		[I]
		Accumulated depreciation-Equipment		[J]
6/31/20X2	Cash		[K]
	Accumulated depreciation-Equipment		[L]
	Loss		[M]
		Equipment		[N]

Answer 1

Journal Entries

Date	Account name	Debit	Credit
1/1/20x1	Equipment	100,000
	Cash		100,000
1/1/20x1	Equipment	10,000
	Cash		10,000
12/31/20x1	Depreciation expense	22,000
	Accumulated depreciation - Equipment		22,000
12/31/20x1	Maintenance expense	2,000
	Cash		2,000
6/31/20x2	Depreciation expense	4,500
	Accumulated depreciation - Equipment		4,500
6/31/20x2	Cash	80,000
	Accumulated depreciation - Equipment	26,500
	Loss on sale of equipment	3,500
	Equipment		110,000

Note

1.Since the customization increase the efficiency it should also be capitalized and depreciated over the useful life of the original asset.Hence 10,000 is added to the cost of the equipment.

2.Depreciation under double declining balance method = 200% of depreciation rate under straight line method

Depreciation rate for straight line method= 100% / 10 years => 10% a year; Depreciation rate for Double declining balance = 10% x 200% => 20%

Depreciation for the year 20x1 = Cost x depreciation rate => 110,000 x 20% => 22,000

3.Maintanence expense does not lead to future economic benefits or increase in the efficiency hence should be expensed.

4.The written down value of fixed asset as on 1/1/20x2 = 110,000 - 22,000 => 88,000; this written down value less scrap value has to be depreciated over the remaining useful life of 9 years under straight line method to effect for the change from DDB method to straight line method.

Depreciation for a year => 88,000 - 7,000 / 9 => 9,000;Depreciation for 6 month period = 9,000 / 2 => 4,500

5.Accumulated depreciation (6/31/20x2) => 22,000 (1/1/20x1 - 12/31/20x1) + 4,500 (1/1/20x2 - 6/31/20x2) => 26,500

Cost of equipment (6/31/20x2) => 110,000 (does not change since no capitalization happened after 1/1/20x1