Question

1. A company purchased new equipment for $270,000 including installation. The company estimates that the equipment will have a residual value (salvage value) of $24,000 and estimates it will use the machine for six years or about 12,000 total hours.

Prepare a depreciation schedule for three years using the following methods:

1. Straight line
2. Activity based

Actual use per year was as follows:

Year	Hours Used
1	3,100
2	1,100
3	1,200

2. Assume the equipment was purchased on August 1. What would be the depreciation for the first year under the straight line method?

3. Company sold its two-year-old bakery ovens for $700,000. The ovens originally cost $910,000, had an estimated service life of 10 years, and an estimated residual value of $60,000. The company uses the straight-line depreciation method for all equipment. (It was purchased on January 1.)

a.	Calculate the balance in the Accumulated Depreciation account at the end of the second year.
b.	Calculate the book value of the ovens at the end of the second year.
c.	Record the sale (journal entry) of the ovens at the end of the second year.

Answer 1

1)

a.

Straight line depreciation = ($270,000 - $24,000) / 6 = $41,000

Straight line method:
Year 1	$41,000
Year 2	$41,000
Year 3	$41,000

b.

Depreciation per hour =  ($270,000 - $24,000) / 12,000 = $20.50 per hour

Activity based method:
Year	Hours	Depreciation per hour	Depreciation
Year 1	3,100	$20.50	$63,550
Year 2	1,100	$20.50	$22,550
Year 3	1,200	$20.50	$24,600

2)

Depreciation expense from August to December. (ie. for 5 months)

Depreciation = $41,000 X 5 / 12

= $17,083

3)

Depreciation expense = ($910,000 - $60,000) / 10 = $85,000

a.

Accumulated depreciation for 2 years = $85,000 X 2

= $170,000

b.

Book value = $910,000 - $170,000

= $740,000

c.

Account Title and Explanation	Debit	Credit
Cash	$700,000	-
Accumulated depreciation	$170,000	-
Loss on sale of Ovens	$40,000	-
Ovens	-	$910,000
(To record sale of Ovens)