Question

On January 2, 2015, Roth, Inc. purchased a laser cutting machine to be used in the fabrication of a part for one of its key products. The machine cost $80,000, and its estimated useful life was four years or 1,000,000 cuttings, after which it could be sold for $5,000.

Calculate the depreciation expense for each year of the machine's useful life under each of the following methods:

a. Straight-line

b. Double-Declining balance

c. Units of Production. Assume annual production in cuttings of 200,000; 350,000; 260,000 and 190,000

Year of Useful Life	Acquisition Cost	Beginnin Book Vlaue	Double decling rate	Anndepreciation	endvalue
year 1
year 2
year 3
year 4
total annual Depreiciation

Repat this chart for all depreciation methods of A, B and C

Assume the company uses the striaght line method and decides to sell the laser cutting machine at the end of the third year. Prepare the following journal entries:

a. Sale of the machine for cash at its book value

b. Sale of the machine for $23,000 cash

c. Sale of the machine for $24,000 cash

Answer 1

a) Depreciation expense for each of the year under straightline method= Cost - residual value / life

= $80,000-5,000/4years = $18,750

b) Double declining method

Year of Useful Life	Acquisition Cost (A)	Beginning Book Vlaue (B)	Double declining rate (C)	Anndepreciation (D) (B*C)	Endvalue (E) (B-D)
Year 1	$80,000	$80,000	100%/4years *2 = 50%	$40,000	$40,000
Year 2		$40,000	50%	$20,000	$20,000
Year 3		$20,000	50%	$10,000	$10,000
Year 4		$10,000	50%	$5000	$ 0 (since remaing set off with residual value of $5,000
Total annual depreciation				$75,000

c) Under Units of production method

Year 1 = $80,000 * 200,000 units / 1,000,000 = $16,000

Year 2 = $80,000* 350,000 units / 1,000,000 = $28,000

Year 3 = $80,000*260,000/1,000,000 = $20,800

Year 4 = $80,000*190,000 / 1,000,000 = $15,200

Journal entries :

1) Cash a/c Dr $23,750

Machine a/c Cr $23,750

(Being sale of machine at book value = $80,000-18,750*3 = $23,750

2) Cash a/c Dr $23,000

Loss on sale of machine Dr $750

Machine a/c Cr $23,750

(Being machine sold at loss)

3) Cash a/c Dr $24,000

Machine a/c Cr $23,750

Gain on sale of machine Cr $750

(Being sale of machine at gain)