Question

Long-lived assets

Make necessary journal entries

1. On Jan 1, 2010 Hampton purchased equipment at a cost of $400,000! installation cost is $20,000. The equipment has a 10 year life and an expected salvage value at the end of 10 yrs. of 20,000

2. On Dec 31, 2010 Hampton determined that the fair value of the equipment was 390,000. No impairment loss is incurred.

3. On Jan 1st, 2011 Hampton revised the useful life of the computers to a total of 14 years to replace the original assumption of 10 years and the salvage value to $30,000

4. On Dec 31,2011 Hampton determined that the fair value of the equipment was $320,000 and an impairment loss is incurred.

5. On March 31, 2012 Hampton sold the equipment for $320,000

Answer 1

Answer :

Depreciation = (Cost - Estimated Salvage value)/ Estimated life of the asset

2010 Depreciation = (420000 - 20000)/10 = $40,000

2011 Depreciation = (420000 - 30000)/15 = $26,000

Depreciation to be claimed for 2010 and 2011 = 2*26000 = $52,000

Already depreciation claimed in years 2010 = $40,000

Balance to be claimed in year 2011 = $52,000 - $40,000 = $12,000

Written down value or Book value as on 31 Dec 2011 = $420000 - $52000 = $368,000

Fair value of the equipment = $320,000

Impairment loss = $368,000 - $320,000

Impairment loss = $48,000

Date	Account Title	Debit	Credit
01.Jan.10	Equipment (400000 + 20000)	$420,000.00	-
	To Cash	-	$420,000.00
	To Record purchase and installation of equipmet		-
31.Dec.10	Depreciation (420000 - 20000)/10years	$40,000.00	-
	To Equipment	-	$40,000.00
	To Record depreciation on equipment	-	-
31.Dec.10	Profit and loss account	$40,000.00	-
	To Depreciation	-	$40,000.00
	To Record adjustment of depreciation account	-	-
1.Jan.11	No Entry	-	-
31.Dec.11	Depreciation	$12,000.00	-
	To Equipment	-	$12,000.00
	To Record depreciation on equipment	-	-
31.Dec.11	Impairment loss	$48,000.00	-
	To Equipment	-	$48,000.00
	To Record impairment loss on equipment	-	-
31.Dec.11	Profit and loss account	$60,000.00	-
	To Depreaciation	-	$12,000.00
	To Impairment loss	-	$48,000.00
	To Record adjustments for depreciation account and impairment loss	-	-
31.Mar.12	Depreciation $26000*3/12	$6,500.00	-
	To Equipment	-	$6,500.00
	To Record depreciation on equipment	-	-
31.Dec.12	Cash	$320,000.00	-
	Loss on sale of equipment (361500 - 320000)	$41,500.00	-
	To Equipment (420000 - 52000-6500)	-	$361,500.00
	To Record sale of equipment	-	-
31.Dec.12	Profit and loss account	$48,000.00	-
	To Depreciation	-	$6,500.00
	To Loss on sale of equipment	-	$41,500.00
	To Record adjustments for depreciation account and loss on sale of equipment	-	-
Note :	It was assumed that straight line depreciation method was followed	-	-