Question

On January 1, 2015, Charmin Manufacturing Company purchased a machine for $220,000. The company expects to use the machine a total of 80,000 hours over the next 10 years. The estimated sales price of the machine at the end of 10 years is $10,000. The company used the machine 8,000 hours in 2015 and 12,000 in 2016.

Requirements:

1.    Compute and show workings for the deprecation expense to be charged using the straight line, units of production and double-declining methods of deprecation for 2015 and 2016. (Round off answers to the nearest dollar where applicable)

2.    Compute the net book value for 2015 and 2016 if the company adopted the double declining method of deprecation.

Question B

Based on the above information, assume that Charmin Manufacturing company adopted the straight-line method and sold the machine for $180,000 on July 1^st, 2017.

Requirements:

1.       Prepare a statement showing the computation of the gain or loss on the disposal of the machine.

2.       Prepare a compound journal entry to record the disposal of the fixed asset as at July 1^st, 2017. (Round off answer to the nearest dollar).

Answer 1

Solution:

Part 1 –

Depreciation expense to be charged using the straight line for 2015 and 2016

Straight Line Method

Straight line method is a method of calculating depreciation of an asset.

Under this method depreciation is calculated by dividing depreciable asset value by estimated useful life.

Depreciable Asset Value = Cost of Asset – Salvage Value

In this method, depreciation for each year remains same.

Mathematically,

Annual Depreciation = (Cost of Asset $220,000 – Salvage Value 10,000) / Useful life 10

= $21,000

Depreciation Expenses for 2015 = $21,000

Depreciation Expenses for 2016 = $21,000

Depreciation expense to be charged using the units of production method for 2015 and 2016

Under the Units of Production method of depreciation, depreciation is charged according to the actual usage of the asset. Higher depreciation is charged when there is higher activity and less is charged when there is low level of operation. Zero depreciation is charged when the asset is idle for the whole period.

Estimated use of Asset during life of machine = 80,000 Hours

Machine’s Depreciable Cost = Cost of Asset – Salvage Value = $220,000 - $10,000 = $210,000

Under the units of production method, the machine's depreciable cost of $210,000 ($220,000 minus $10,000) is divided by estimated production during the life of machine 80,000 Hours, resulting in depreciation of $2.625 per hour.

Depreciation Expense for 2015 = Machine Hour Use 8,000 x Depreciation Rate 2.625 = $21,000

Depreciation Expense for 2016 = Machine Hour Use 12,000 x Depreciation Rate 2.625 = $31,500

Depreciation expense to be charged using the Double Declining Method for 2015 and 2016

It is a method of depreciation used by the companies when they want to quickly depreciate an asset.

The asset will depreciate much faster under this method than straight-line because we double the percentage that would be depreciated each year under straight-line.

Salvage value is not subtracted from Cost of Asset when depreciation is calculated by using this method.

The formula for double declining balance is:

Annual depreciation = Book Value * 100% / life * 2

Calculate the percentage that should be used first.

Percentage = 100% / Useful Life x 2 = 100% / 10 x 2 = 20%

Once the percentage is calculated, it is the same for the rest of the asset’s life.

Year	DDB Depreciation for the period			End of Period
	Beginning of period book value	Depreciation Rate	Depreciation Expenses	Accumulated Depreciation	Book Value
Year 2015	220,000	20.000%	44,000	44,000	176,000
Year 2016	176,000	20.000%	35,200	79,200	140,800

Depreciation for Year 2015 = $44,000

Depreciation for Year 2016 = $35,200

Part 2 -- Net book value for 2015 and 2016 if the company adopted the double declining method of deprecation.

Year	DDB Depreciation for the period			End of Period
	Beginning of period book value	Depreciation Rate	Depreciation Expenses	Accumulated Depreciation	Book Value
Year 2015	220,000	20.000%	44,000	44,000	176,000
Year 2016	176,000	20.000%	35,200	79,200	140,800

Net Book Value for 2015 = $176,000

Net Book value for 2016 = $140,800

Part B(1) ---

Computation of gain or loss on the disposal of mACHINE

Carrying Value of the Machine as on July 1^st, 2017 = Cost of Asset – Accumulated Depreciation till June 30, 2017 i.e. 2-1/2 Years

= $220,000 – (21,000*2.5)

= 220,000 – 52,500

= $167,500

Sale Value of Asset = $180,000

Here Sale Value is higher than Carrying Value, resulting gain of $12,500 (180,000 – 167,500) on disposal of asset.

Part B(2) – Journal Entry on Disposal

Date	General Journal	Debit	Credit
July.1, 2017	Cash	$180,000
	Accumulated Depreciation	$52,500
	Machine Account		$220,000
	Gain on Disposal of Asset		$12,500

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