Question

The first part of the question was answered and I was able to understand it, but the second part of it was answered. Can you explain this part to me.

Calculate the amount to be recorded for each item in the table below and enter the value in the associated cell. Round all numbers to the nearest whole number.

Item	Amount
Building
Leased equipment
Land received from Club on Link's books
Land received from Link on Club's books

QUESTION 22

1. Link completed the following transactions:
   
   On January 2, year 1 Link Co. purchased a manufacturing machine for $864,000. The machine has an eight year estimated life and a $144,000 estimated salvage value. Link expects to manufacture 1,800,000 units over the life of the machine. During year 2, Link manufactured 300,000 units.
   
   During year 2, Link purchased an office building and the land on which it is located by paying $800,000 cash and assuming an existing mortgage of $200,000. The property is assessed at $960,000 for realty tax purposes, of which 60% is allocated to the building.
   
   During year 2, Link leased construction equipment under a 7-year capital lease requiring annual year-end payments of $100,000. Link's incremental borrowing rate is 9%, while the lessor's implicit rate, which is not known to Link, is 8%. Present value factors for an ordinary annuity for seven periods are 5.21 at 8% and 5.03 at 9%. Fair value of the equipment is $515,000.
   
   During year 2, Link paid $50,000 and gave a plot of undeveloped land with a carrying amount of $320,000 and a fair value of $450,000 to Club Co. in exchange for a plot of undeveloped land with a fair value of $500,000. The land was carried on Club's books at $350,000. This transaction has commercial substance.
   
   For each depreciation method listed in the table below, calculate depreciation expense for year 2 (the second year of ownership) for the machine purchased on January 2, year 1. Click in the associated cell and enter the appropriate value. Round all amounts to the nearest whole number.

Answer 1

Solution ;

Given in Question -

Cost of machine = $ 8,64,000

Useful life = 8 years

Residual value = $ 1,44,000

Calculation of Depreciation under various methods

1) Straight Line Method

It is the process charging equal amount of depreciation every year over the useful life of asset.

The equation to find yearly depreciation is as follows:

Depreciation per year = (Cost - Residual value) / Estimated useful life in years

Depreciation under Straight line method for year 2 will be -

=> (864,000 - 144,000) / 8

=> $ 90,000

2) Double Declining Balance Method

It is also known as accelerated depreciation method. Under this method, depreciation in the beginning years of the assets life is more and decreases gradually year after year.

The equation to find yearly depreciation is as follows:

Depreciation per year = (2 * Book value at the beginning of the year) / Estimated useful life in years

Depreciation under Double Declining Balance Method will be -
For year 1
Book value of machine at beginning of 1st year	864,000.00
Depreciation for 1st Year   {(2 * 864,000) / 8}	216,000.00
Book value of machine at end of 1st year	648,000.00
For year 2
Book value of machine at beginning of 2nd year	648,000.00
Depreciation for 2nd Year   {(2 * 648,000 / 8}	162,000.00
Book value of machine at end of 2nd year	486,000.00
Depreciation under Double Declining Balance Method for year 2 will be $ 162,000

3) Sum-of-years Digit Method

It allocates higher amount of depreciation in earlier years of assets useful life and lesser depreciation in later life.

The equation to find yearly depreciation is as follows:

Depreciation = [(Cost - Residual value) * Remaining useful life at beginning of year ] / Sum of each year of the estimated useful life

Given that machine has estimated useful life of 8 years. So, at beginning of year 1 estimated useful life is 8 years, for 2nd year estimated useful life is 7 years and

for subsequent year estimated useful life will be 6,5,4,3,2,1. The total of each year of the estimated useful life is 36.

The remaining useful life at beginning of year 2 will be 7 years because for 1 year machine has been used.

Therefore, Depreciation under Sum-of-years Digit Method for year 2 will be -

=> [(864,000 - 144,000) * 7] / 36

=> $ 140,000

4) Units-of-Production Method

This method allocates a fixed amount of depreciation to each unit of output.

The equation to find yearly depreciation is as follows:

Depreciation = (Cost - Residual value) / Estimated units manufactured over the life of the machine.

Estimated units manufactured over the life of the machine is 1,800,000 units.

Depreciation per unit of production =

=> (864,000 - 144,000) / 1,800,000

=> $ 0.4/ unit

In the 2nd year, machine produced 300,000 units

Therefore, Depreciation under Units-of-Production Method for year 2 will be -

=> 300,000 * 0.4

=> $ 120,000

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