Question

On January 2, 2018, the Mulberry Street Corporation (a calendar year corporation) purchased heavy equipment in the amount of $550,000. It is expected to be used for 10 years, with a residual value at the end of that time of $70,000. Expenditures required to place the asset in service amounted to $120,000. The company also purchased a patent at a cost of $80,000 on July 1, 2018. It is expected to be used for six years, with no value at the end of that time. The management of Mulberry Street depreciates heavy equipment by the declining-balance method at 200 percent of the straight line. It amortizes intangible assets by the straight-line method.

1) Calculate depreciation and amortization for 2018 and 2019.

2) Prepare the journal entries for 2018 and 2019.

3) How much more depreciation was taken in the two years than if the company used straightline? What was the effect on the financial statements?

4) Prepare the plant and intangible assets section of Mulberry's balance sheet at the end of 2019.

Answer 1

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Part -1
Depreciation Rate	(1/10)*2	20%
Annual Depreciation-Year 2018	(550000+120000)*20%		$     134,000
Annual Depreciation-Year 2019	(550000+120000-134000)*20%		$     107,200
Amortization Year 2018	80000/6*1/2		$          6,667
Amortization Year 2019	80000/6		$        13,333
Part -2	Journal Entries:
Date	Account	Debit	Credit
2 Jan 2018	Equipment	$670,000
	Cash		$     670,000
1 Jul 2018	Patent	$ 80,000
	Cash		$        80,000
31 Dec 2018	Depreciation Expense-Equipment	$134,000
	Accumulated Depreciation-Equipment		$     134,000
31 Dec 2018	Amortization Expense	$    6,667
	Accumulated Amortization		$          6,667
31 Dec 2019	Depreciation Expense-Equipment	$107,200
	Accumulated Depreciation-Equipment		$     107,200
31 Dec 2019	Amortization Expense	$ 13,333
	Accumulated Amortization		$        13,333
Part -3
Straight Line Dep on equipment
Annual Depreciation-Year 2018	(550000+120000-70000)/10		$        60,000
Annual Depreciation-Year 2019	(550000+120000-70000)/10		$        60,000
Total SLM Depreciation			$     120,000
Total Declining Balance Dep			$     241,200
More Depreciation Taken	241200-120000		$     121,200
Net Income	Lower by $ 121,200
Equipment, net	Lower by $ 121,200
Part -4
Plant, Property and Equipment:
Equipment		$670,000
Less: Accumulated Depreciation		$241,200
Equipment, Net			$     428,800
Patent		$ 80,000
Less: Accumulated Amortization		$ 20,000
Patent, Net			$        60,000