Question

Depreciation by Two Methods; Sale of Fixed Asset

New lithographic equipment, acquired at a cost of $718,750 on March 1 of Year 1 (beginning of the fiscal year), has an estimated useful life of five years and an estimated residual value of $61,800. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year.

On March 4 of Year 5, the equipment was sold for $105,300.

Required:

1. Determine the annual depreciation expense for each of the estimated five years of use, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by the following methods:

a. Straight-line method

Year	Depreciation Expense	Accumulated Depreciation, End of Year	Book Value, End of Year
1	$	$	$
2	$	$	$
3	$	$	$
4	$	$	$
5	$	$	$

b. Double-declining-balance method

Year	Depreciation Expense	Accumulated Depreciation, End of Year	Book Value, End of Year
1	$	$	$
2	$	$	$
3	$	$	$
4	$	$	$
5	$	$	$

2. Journalize the entry to record the sale assuming that the manager chose the double declining-balance method. If an amount box does not require an entry, leave it blank.

3. Journalize the entry to record the sale in (2) assuming that the equipment was sold for $90,400 instead of $105,300. If an amount box does not require an entry, leave it blank.

Answer 1

Answer to part 1
Information:-
Cost of Equipment	$                   7,18,750
Residual value	$                      61,800
Sales value, year 5 beginning	$                   1,05,300
Useful life	5 years
Depreciation rate	= 1/5
	20.00%
Double-declining dep rate	40.00%
Straight Line depreciation	= (718750 - 61800) / 5
	$                   1,31,390
(a) Straight - line method
Year	Depreciation Expense	Accumulated Depreciation	Book Value
1	$                     1,31,390	$                             1,31,390	$    5,87,360
2	$                     1,31,390	$                             2,62,780	$    4,55,970
3	$                     1,31,390	$                             3,94,170	$    3,24,580
4	$                     1,31,390	$                             5,25,560	$    1,93,190
5	$                     1,31,390	$                             6,56,950	$      61,800
(a) Double-Declining balance Method
Year	Depreciation Expense @ 40%	Accumulated Depreciation	Book Value
1	$                     2,87,500	$                             2,87,500	$    4,31,250
2	$                     1,72,500	$                             4,60,000	$    2,58,750
3	$                     1,03,500	$                             5,63,500	$    1,55,250
4	$                        62,100	$                             6,25,600	$      93,150
5	$                        31,350	$                             6,56,950	$      61,800
To Balance residual value at $ 61,800/- last year depreciation will be less than actual.

Answer to part 2
Information
Book value of equipment	$                        93,150
Sale Value	$                     1,05,300
Gain on sale	$                        12,150
Journal Entry
Bank A/c	Debit	$                             1,05,300
Accumulated Depreciation	Debit	$                             6,25,600
To Equipment A/c	Credit	$                             7,18,750
To Gain on sale (P&L)	Credit	$                               12,150
(Being sale of capital equipment)

Answer to part 3
Information
Book value of equipment	$                        93,150
Sale Value	$                        90,400
Loss on sale	$                        (2,750)
Journal Entry
Bank A/c	Debit	$                               90,400
Accumulated Depreciation	Debit	$                             6,25,600
Loss on Sale (P&L)	Debit	$                                 2,750
To Equipment A/c	Credit	$                             7,18,750
(Being sale of capital equipment)