Question

#1: Prepare a depreciation schedule:

Z Company's fiscal year runs July 1st to June 30th. The company purchased a new machine which was installed and operational at the beginning of the second quarter in October. Machine purchase price of $145,800 with an additional installation cost of $10,000, and has an estimated useful life of four years from installation and estimated salvage value of $5,600.

Required:

1. Prepare a depreciation schedule showing Net Book value (beginning and ending), depreciation expense, and accumulated depreciation for the asset. Hint: pay attention to dates of acquisition and fiscal year.

Prepare one schedule for each method:

a. Straight-line

b. Double-declining balance

2. Z Company receives an offer of $45,000 for the machine at the end of the third fiscal year.

a. What factors should Z Company consider in determining whether to sell or keep the machine?

b. Assume the machine is sold. Prepare the appropriate journal entry showing sale of the machine and disposition of asset under each depreciation schedule.

Answer 1

• All working forms part of the answer
• Amounts are in $
• Working for both methods of Depreciation

Working		Amount ($)
A	Purchase cost on 1 Oct	145800
B	Add: installation cost	10000
C=A+B	Cost to be capitalised	$155800
D	Less: Salvage value	5600
E=C-D	Depreciable base	$150200
F	Useful life (in years)	4
G=E/F	Annual Straight Line Depreciation	$37550
H=G/E	SLM Rate	25%
I=H x2	Double declining balance	50%

• Straight Line Depreciation Schedule

Year	Opening book Value	Depreciation expense	Closing Book Value	Accumulated Depreciation
1 (3 quarters)	155800	[37550 x9/12months] 28162.5	127637.5	28162.5
2	127637.5	37550	90087.5	65712.5
3	90087.5	37550	52537.5	103262.5
4	52537.5	37550	14987.5	140812.5
5 (1 quarter)	14987.5	[37550 x 3/12months] 9387.5	5600	150200
		$150200

• Double declining balance Schedule

Year	Opening Balance	Depreciation rate	Depreciation expense	Closing Net Book Value	Accumulated Depreciation
1 (3 quarters)	155800	50%	([155800 x 50%]x9/12) 58425	97375	58425
2	97375	50%	48688	48688	107113
3	48687.5	50%	24344	24344	131456
4	24343.75	50%	12172	12172	143628
5 (1 quarter)	12171.88		6572	5600	150200
			$150200

• Answer to 2 (a)

Z Company should see if the depreciated book value is less or more than the consideration.

Also, it should consider, whether the machine will be as efficient as it is expected or its better to sell it off.

• Answer to 2 (b) : Journal Entries in both the methods

Straight Line Method

As per working above, net book value at the end of 3^rd year is $52537.5. Sold at $45000. Hence loss is of $7537.5

General Journal	Dr (in $)	Cr (in $)
Cash	45000
Accumulated Depreciation	103262.5
Loss on Sale of machine	7537.5
Machine		155800

Double Declining Balance Method

As per working above, net book value at the end of 3^rd year is $24344. Sold at $45000. Hence gain is of $20656

General Journal	Dr (in $)	Cr (in $)
Cash	45000
Accumulated Depreciation	131456
Machine		155800
Gain on Sale of Machine		20656