Question

On January 1, 2018, the general ledger of Parts Unlimited includes the following account balances:

Accounts	Debit			Credit
Cash	$	169,400
Accounts Receivable		19,400
Inventory		44,800
Land		347,000
Equipment		362,500
Accumulated depreciation				$	179,000
Accounts Payable					21,800
Common stock					527,000
Retained Earnings					215,300
Totals	$	943,100		$	943,100

From January 1 to December 31, the following summary transactions occur:

Purchased inventory on account, $332,800.

Sold inventory on account, $593,200. The inventory cost $349,600.

Received cash from customers on account, $565,700.

Paid cash on account, $335,500.

Paid cash for salaries, $101,700, and for utilities, $59,700.

In addition, Parts Unlimited had the following transactions during the year:

April		1		Purchased equipment for $102,000 using a note payable, due in 12 months plus 8% interest. The company also paid cash of $3,900 for freight and $4,500 for installation and testing of the equipment. The equipment has an estimated residual value of $12,400 and a ten-year service life.
June		30		Purchased a patent for $47,000 from a third-party marketing company related to the packaging of the company’s products. The patent has a 20-year useful life, after which it is expected to have no value.
October		1		Sold equipment for $37,900. The equipment cost $67,700 and had accumulated depreciation of $44,400 at the beginning of the year. Additional depreciation for 2018 up to the point of the sale is $9,200.
November		15		Several older pieces of equipment were improved by replacing major components at a cost of $61,100. These improvements are expected to enhance the equipment’s operating capabilities. [Record this transaction using Alternative 2 – capitalization of new cost.]

Year-end adjusting entries:

Depreciation on the equipment purchased on April 1, 2018, calculated using the straight-line method.

Depreciation on the remaining equipment, $28,500.

Amortization of the patent purchased on June 30, 2018, using the straight-line method.

Accrued interest payable on the note payable.

Equipment with an original cost of $73,100 had the following related information at the end of the year: accumulated depreciation of $45,900, expected cash flows of $22,700, and a fair value of $14,300.

Accrued income taxes at the end of the year are $19,600.

Suppose the equipment purchased on April 1, 2018, had been depreciated using the units of production method. At the time of purchase, expected output was 20,000 units, and the actual output was 3000 units. Calculate the amount of depreciation expense that would have been recorded and determine the difference in income and total assets for 2018 (ignoring tax effects).

Thank you!

Answer 1

In case of straight line method of depreciation in case of new equipment purchased and on patent purchased and considering fair value accounting for equipment for which expected cash flow and fair value estimate have been given, Depreciation expense, Income and Total Assets would have been as follows:

Accumulated Depreciation Account
Particulars	Amount	Particulars	Amount
To, Sale of Equipment	44400	By, Opening Balance	179000
To, Closing Balance	195000	By, Depreciation (New Equipment)	9800
		By, Depreciation (Equipment sold)	9200
		By, Depreciation (Remaining Equipment)	28500
		By, Depreciation (Fair value measuremment)	12900
Total	239400	Total	239400

Profit & Loss Account
Particulars		Amount	Particulars		Amount
To, Opening Stock		44800	By, Sales		593200
To, Purchases		332800	By, Closing Stock		28000
To, Gross profit		243600
Total		621200	Total		621200
To, Salary		101700	By, Gross profit		243600
To, utilities		59700	By, gain on sale of equipment		23800
To, interest on note payable		6120
To, taxes payable		19600
To, net profit		19880
To, Depreciation		60400
Total		267400	Total		267400

Assets	Amount
Cash	159600
Accounts Receivable	46900
Inventory	28000
Land	347000
Equipment
Less: Accumulated Depreciation	271300
Patent	44650
Total Assets	897450

In case of units of production method of depreciation, for the new equipment purchased in April 2018, the Depreciation expense, Income and Total Assets would be as under:

Accumulated Depreciation Account
Particulars	Amount	Particulars	Amount
To, Sale of Equipment	44400	By, Opening Balance	179000
To, Closing Balance	199900	By, Depreciation (New Equipment)	14700
		By, Depreciation (Equipment sold)	9200
		By, Depreciation (Remaining Equipment)	28500
		By, Depreciation (Fair value measuremment)	12900
Total	244300	Total	244300

Profit & Loss Account
Particulars		Amount	Particulars	Amount
To, Opening Stock		44800	By, Sales	593200
To, Purchases		332800	By, Closing Stock	28000
To, Gross profit		243600
Total		621200	Total	621200
To, Salary		101700	By, Gross profit	243600
To, utilities		59700	By, gain on sale of equipment	23800
To, interest on note payable		6120
To, taxes payable		19600
To, net profit		14980
To, Depreciation		65300
Total		267400	Total	267400

Assets	Amount	Amount
Cash		159600
Accounts Receivable		46900
Inventory		28000
Land		347000
Equipment	466300
Less: Accumulated Depreciation	-199900	266400
Patent		44650
Total Assets		892550

Thus from the above analysis, the differences can be calculated in two different scenarios.