Question

On March 31, 2018, the Herzog Company purchased a factory complete with machinery and equipment. The allocation of the total purchase price of $960,000 to the various types of assets along with estimated useful lives and residual values are as follows:

Asset	Cost				Estimated Residual Value				Estimated Useful Life in Years
Land	$	120,000				N/A			N/A
Building		460,000				none			25
Machinery		260,000				10% of cost			6
Equipment		120,000			$	15,000			5
Total	$	960,000

On June 29, 2019, machinery included in the March 31, 2018, purchase that cost $96,000 was sold for $76,000. Herzog uses the straight-line depreciation method for buildings and machinery and the sum-of-the-years'-digits method for equipment. Partial-year depreciation is calculated based on the number of months an asset is in service.

Required:

1. Compute depreciation expense on the building, machinery, and equipment for 2018.
2. Prepare the journal entries to record the depreciation on the machinery sold on June 29, 2019, and the sale of machinery.
3. Compute depreciation expense on the building, remaining machinery, and equipment for 2019.

Answer 1

Depreciation expense for 2018

Building
Purchase cost		$ 460,000.00
Estimated Life		25	years
Residual value		nil
Depreciation expense per annum =				$ 460,000 / 25 years
			=	$                 18,400.00
Depreciation expense for 2018 =			($ 18,400 * 9 months)/ 12 months
		=	$ 13,800.00

Machinery
Purchase cost		$ 260,000.00
Estimated Life		6
Residual value		$    26,000.00
Depreciable amount =		$ 260000 - $ 26000 =		$ 234,000.00
Depreciation expense per annum =				($ 260000- $ 26000)/ 6 years
			=	$    39,000.00
Depreciation expense for 2018 =			($ 39000 * 9 months)/12 months
		=	$ 29,250.00

Equipment
Purchase cost		$ 120,000.00
Estimated Life		5
Residual value		$    15,000.00
Depreciable amount =		$ 105,000.00
Sum of year's digit =		5 + 4 + 3 + 2 + 1
	=	15
Depreciation expense for 2018 =			$ 105,000 x 5/15 x 9/12
		=	$ 26,250.00

	Depreciation for machinery sold
	Book value as on 31.3.2018	$ 96,000.00
Less:	Depreciation for 9 months	$ 12,000.00
	[( $ 29250/ $ 234000)* $ 96000]
	Book value as on 1.1.2019	$ 84,000.00
Less:	Depreciation for 6 months	$    8,000.00
	[( $ 39000 / $ 234000)* $ 96000 x 6/12]
	Book value on the date of sale	$ 76,000.00
Less:	Selling price	$ 76,000.00
	Profit/ (Loss)	NIL

Journal
Bank A/c			$ 76,000.00
Accumulated Depreciation A/c			$ 20,000.00
To Equipment A/c				$ 96,000.00
( being machinery sold for $ 76,000)

Depreciation expense for 2019

Building
Depreciation expense =			$18,400

Machinery
Remaining portion =	$ 234000 - $ 96000
	$ 138,000.00
Depreciation expense =	($ 39000 x $ 138000)/ $ 234000
( only for remaining portion)
Depreciation for 2019 =	$    23,000.00

Equipment
For remaining 3 months =			$ 105000 x 5/15 x 3/12 =			$    8,750.00
For next 9 months =			$ 105000 x 4/15 x 9/12 =			$ 21,000.00
		Depreciation for 2019				$ 29,750.00