Question

2. On January 1, 2015, SAS Corp. purchased and placed in service a machine. The following information is available regarding the machine, show all calculations: (20 points)

Acquisition cost ...................................................... $130,000

Estimated salvage value .......................................... $15,000

Estimated useful life ............................................... 5 years

a. Using straight line depreciation, make the necessary adjusting journal entry at December 31, 2015.

b. What would be the balance of the accumulated depreciation account after the 4th year adjusting entry?

c. How would the machine and accumulated depreciation be presented on the balance sheet after the 4th year adjusting entry?

d. The machine is sold on January 1st 2019 for $50,000 cash, make the entry to record the gain or loss on sale.

Answer 1

As per straight Line method, equal amount of depreciation will be charged every year of it's estimated useful life so that at the end of it, it reaches it's salvage value. To calculate depreciation of each year, the following formula is used:

Depreciation = (Acquisition cost- Salvage Value) / Estimated Useful Life of Machine

(using above formula, in given case)
Depreciation per year = (130000-15000) / 5 years
= $23000 per year

a)  Journal Entry for Depreciation at December 2015
Depreciation A/C (Dr) $23000
To Accumulated Depreciation A/C (Cr) $23000

Depreciation is a charge against fixed asset which reduces it's value, every year same entry will be passed where Depreciation will be debited as it is an expense shown in INCOME STATEMENT and Accumulated depreciation A/C will be credited as it is shown as Contra in BALANCE SHEET. This will continue for Estimated Useful Life of machine by the end of which the Balance in Accumulated Depreciation A/C will have the same Balance as Acquisition cost of Machine ( - Salvage Value)

b) Same entry as shown in (a) will be charged every year for same amount of Depreciation and it will keep on adding to Accumulated Depreciation A/C. So balance of Accumulated Depreciation account after the 4th year adjusting entry will be:
Depreciation for 1st Year = $23000
Depreciation for 2nd Year = $23000
Depreciation for 3rd year = $23000
Depreciation for 4th year =   $23000
Balance in Accumulated Depreciation A/C- $92000

c) With each year as depreciation is charged in INCOME STATEMENT, it keeps on adding to the value of Accumulated Depreciation account and the Accumulated Depreciation decreases the value of the asset in Balance sheet over time so that we can get the Book value of that asset in that particular year.
In the Given case Machine and Accumulated depreciation will be shown in Balance Sheet after the 4th year adjusting entry in the following way:

Cost of the Machine = $130000
Less:Accumulated Depreciation = -$92000
Book Value of Machine = $38000

d) The value of Machine on January 1st 2019 was $38000 after deducting accumulated depreciation of 4 years ($92000), however if machine at that time was sold for $50000 than we earn a Profit on sale of Machine of $12000 ( $50000 - $ 38000)
The entry to record the gain or loss on Sale is as follows:
Accumulated Depreciation A/C (Dr) $92000
Cash A/C (Dr) $50000
To Machine A/C (Cr) $130000
To Profit on sale of Machine A/C (Cr) $12000