Question

On January 2, 20x0, Chegal Ltd. purchased equipment for $100,000. Chegal had to spend an additional $10,000 for transportation and $15,000 for installation of the equipment. Assume that all of these were paid in cash. The equipment is expected to produce a total of 100,000 widgets over its life of 5 years. The residual value expected at the end of 5 years is $25,000. During 20x0, Chegal produced 19,000 widgets.

Required -

a. Prepare the journal entry to record the acquisition of the equipment on January 2, 20x0.

b. Prepare the journal entry at December 31, 20x0 to record the depreciation using the unitsof-production method.

Items c, d and e do not require journal entries

c. Assume Chegal uses the straight-line method of depreciation. Calculate the depreciation expense for the year ended December 31, 20x0. d. Assume Chegal uses the diminishing balance method of depreciation at a rate of 40%. Calculate the depreciation expense for the year ended December 31, 20x0, 20x1, 20x2 and 20x3. e. Assume that the straight-line method is used and that the equipment is disposed of on December 31, 20x2 for $52,000. Calculate the gain or loss on disposal on sale of equipment. Depreciation expense for the year ended December 31, 20x2 has been recorded.

Answer 1

Solution

PART a & b

Answer No.	Date	Particulars	Debit($)	Credit($)
	Jan 2, 20x0	Equipment A/c Dr.	125,000
a)		Cash A/c (100,000+10,000+15,000)		125,000
		(Being Equipment Purchased is recorded)
	Dec 31,20x0	Depreciation Expense A/c Dr	19,000
b)		Accumulated Depreciation A/c		19,000
		(Depreciation charged on the basis of units of Production method)

Notes:

1. Cost Incidental to bring the asset to its workable condition is also capitilised. Hence Transportation cost($10,000) and installation cost($15,000) is added to cost of asset. The same value is to used for depreciation purposes.

2. Depreciation using units of Production Method

Unit of production method is a method of charging depreciation on assets. Under this method depreciation is calculated proportionately on the basis of number of unit in a year.

Formula: Yearly Depreciation=Depreciable Value X (Unit Produced during the Year/Total expected Production)

Depreciable Value= Original Cost-Residual Value

Particulars	Value
Original Cost ($)	125,000
Less: Residual Value($)	25,000
Depreciable Value ($)	100,000
Expected Units of Production (Units)	100,000
First Year Production (units)	19,000

First Year Depeciation = $100,000 X (19,000units/100,000 units)

= $19,000

Part C

Depreciation under Straight line method

Depreciation = (Cost of Asset – Residual Value) / Useful Life

= ($125000-$25000)/ 5

= $20,000 per year

So the depreciation for year ended December 31,2020 is $ 20,000.

Part D

Depreciation Under Diminishing balance method.

Under this method Rate of depreciation is applied to book value of asset. As Book value goes down every year , the amount of depreciation also goes down, hence it is known as Diminishing balance method.

Amount of depreciation=Book Value×Rate of Depreciation(%)

Table showing depreciation for 4 years is as follows.

Date	Book Value (B)	Depreciation C= (B X 40%)	Balance Book Value (C-B)
December 31,20X0	1,25,000	50,000	75,000
December 31,20X1	75,000	30,000	45,000
December 31,20X2	45,000	18,000	27,000
December 31,20X3	27,000	10,800	16,200

Part E

Gain or Loss on disposal of Asset.

  When asset is sold it will result in gain or loss. Gain occurs when sale proceeds of assets exceeds its book value on date of sale or vice versa.

Gain/(Loss) = Sale proceeds- Book value on date of sale.

= $52,000- $65,000

= ($13,000)

Loss on Disposal of Equipment is $13,000.

Table Showing Book value is as follows

Date	Book Value (B)	Depreciation C ($)	Balance Book Value (C-B)
December 31,20X0	125,000	20,000	105,000
December 31,20X1	105,000	20,000	85,000
December 31,20X2	85,000	20,000	65,000

Refer answer c for calculation of depreciation.

Please revert back if any clarifications are required.