Question

On January 1, 2015, Declan Company purchased a machine for $153,300. Declan paid $12,000 to ship the machine from the manufacturer in China and $3,200 in customs fees and $1,500 to rearrange the workspace to fit the machine. The machine had a $20,000 salvage value and a five -year useful life.

1. Determine the amount that Declan would capitalize as the cost of the machine.

2. Calculate the depreciation expense, accumulated depreciation and book value of the asset for all five years, assuming that Declan uses the double-declining balance method. (I recommend that you create a chart to work this part of the problem.)

3.  Assume that Declan sold the asset for $35,000 on December 31st, 2018. How much gain or loss would they recognize on the sale, assuming they used the a) Straight-line method and b) Double-Declining balance method?

Answer 1

Solution

Declan Company

1. Determination of the amount to be capitalized as cost of the machine:

Purchase price of machine –

Cost           $153,300

Freight      $12,000

Customs fees $3,200

Workspace expenditure $1,500

Total cost of machine $170,000

2. Double declining balance depreciation schedule for five years –

Date	Depreciation Expense	Accumulated depreciation	Book Value
Dec 31, 2015	$68,000	$68,000	$102,000
Dec 31, 2016	$40,800	$108,800	$61,200
Dec 31, 2017	$24,480	$133,280	$36,720
Dec 31, 2018	$14,688	$147,968	$22,032
Dec 31, 2019	$,2032	$150,000	$20,000

Computations:

Deprecation rate = 2 x 1/5 = 40%

First year –

Depreciation = 170,000 x 40% = $68,000

Book value at end of year = 170,000 – 68,000 = 102,000

Second year –

Depreciation = book value x depreciation rate

= 102,000 x 40% = $40,800

Acc. Dep = 68,000 + 40,800 = 108,800

BV = 170,000 – 108,800 = $61,200

Third year –

Depreciation = 61,200 x 40% = $24,480

Acc. Dep = 108,800 + 24,480 = $133,280

BV = 170,000 – 133,280 = $36,720

Fourth year –

Depreciation = 36,720 x 40% = 14,688

Acc. Dep = 133,280 + 14,688 = 147,968

BV = 170,000 – 147,968 = $22,032

Fifth year -
since the providing depreciation at 40% on 22,032 would make the bv decline below the salvage value of 20,000, the current year depreciation expense is adjusted accordingly.

Depreciation expense = 22,032 – 20,000 = 2,032

3. Determination of the gain or loss on sale of asset on December 31, 2018:

1. Assuming straight line method of depreciation:

Annual depreciation expense = (170,000 – 20,000) x 1/5 = $30,000

Accumulated depreciation, December 31, 2018 = 30,000 x 4 = $120,000

Book value , Dec 31, 2018 = 170,000 – 120,000 = $50,000

Gain or (loss) on sale of asset = 35,000 – 50,000 = ($15,000)

Hence, loss on sale of machine = $15,000

2. Assuming DDB method of depreciation:

BV at December 31, 2018 = 22,032

Sale proceeds = $35,000

Gain on sale = 35,000 – 22,032 = $12,968