Question

Highsmith Rental Company purchased an apartment building early in 2018. There are 20 apartments in the building and each is furnished with major kitchen appliances. The company has decided to use the group depreciation method for the appliances. The following data are available:

Appliance	Cost			Residual Value			Service Life (in Years)
Stoves	$	55,000		$	4,000		6
Refrigerators		50,000			3,000		5
Dishwashers		48,000			2,000		4

In 2021, two new refrigerators costing $4,700 were purchased for cash. The old refrigerators, which originally cost $5,500, were sold for $2,200.

Required:
1. Calculate the group depreciation rate, group life, and depreciation for 2018.
2. Prepare the journal entries to record the purchase of the new refrigerators and the sale of the old refrigerato

Answer 1

1	Calculate group depreciation rate, group life and depreciation for 2018
	Assets	Cost (1)	Residual Value (2)	Depreciable Base (3)(1-2)	Estimated Life (4)	Depreciation per year (5)(3/4)
	Stoves	$55,000	$4,000	$51,000	6	$8,500
	Refreigerators	$50,000	$3,000	$47,000	5	$9,400
	Dishwashers	$48,000	$2,000	$46,000	4	$11,500
	Total	$153,000	$9,000	$144,000		$29,400
	Group Depreciation rate
	Total Depreciation	$29,400
	Total cost	$153,000
	Group Depreciation rate	0.192
	Group life
	Total Depreciable Base	$144,000
	Total Depreciation	$29,400
	Group life	5
	Depreciation for 2018
	Total cost	$153,000
	Group Depreciation rate	0.192
	Depreciation for 2018	$29,400
2	Journal entries to record the purchase of the new refrigerators and the sale of the old refrigerators
	Refrigerators	$4,700
	Cash		$4,700
	(To record purchase of new refrigerators)
	Cash	$2,200
	Loss on sale of refrigerator	$129
	Refrigerators		$2,329
	(To record sale of old refrigerators)
	Working Note:
	Cost of refrigerators sold	$5,500
	Group depreciation rate	0.192
	Depreciation per year	$1,057
	Depreciation for 3 year (2018-2020)	$3,171
	Carrying value of refrigerator sold	$2,329
	Sale value	$2,200
	Loss	$129