Question

Meca Concrete purchased a mixer on January 1, 2019, at a cost of $206,000. Meca used sum of the year digit method for depreciation for 2019 and 2020 . It was based on an estimated eight-year life and $5,000 estimated residual value. In 2021, Meca switched the depreciation method to tdeclining balance method and revised its estimate and now believes the mixer will have a total service life of only seven years, and that the residual value will be only $2,000.

Required:
1. Compute and record depreciation for 2021 and 2022.

2. Meca sold the mixer on January 1st 2023 for 20,000. Prepare journal entry to record the sales entry .

Answer 1

Depreciable amount = Total acquisition cost – Salvage Amount

Depreciable amount = 206000-5000

= 201000

Sum of years             = 8+7+6+5+4+3+2+1

= 36

Depreciation for 2019 & 2020

2019                          =201000/36*8

= 44666.67

2020                          =201000/36*7

= 39083.33

Value as 1 Jan 2021       =206000-44666.67-39083.33

=122250

Assuming method of depreciation has been changed with prospective efforts

Life is of 7 years

Depreciation rate (as it is not given)

=1 – [s/c]1/n

where S = Scrap value

where C = WDV in the beginning

where N = number of years

=1-((2000/122250)^(1/7))

=44.43%

Depreciation for the year

2021                          =122250*44.43%

= 54315.67

WDV as on 31/12/2021 = (122250-54315.67)=67934.33

2022                           =67934.33*44.43%

=30183.22

WDV as on 31/12/2022 = (67934.33-30183.22)=37751.11

Journal entry

Accumulated Depreciation         Dr           168248.89

Bank                                                      Dr               20000

Loss on sale of asset                        Dr               37751.11

Asset                                                     Cr             206000

Sale of asset                                       Cr              20000