Question

New lithographic equipment, acquired at a cost of $800,000 at the beginning of a fiscal year, has an estimated useful life of five years and an estimated residual value of $90,000. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year. On the basis of the data presented to the manager, the double-declining-balance method was selected.

In the first week of the fifth year, the equipment was sold for $134,570.

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	$	$	$

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

Hide 3. Journalize the entry to record the sale, assuming that the equipment was sold for $88,180 instead of $134,570. If an amount box does not require an entry, leave it blank.

Answer 1

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New Lithographic Equipment
Workings for capitalized cost	Amount $	Note
Purchase cost of equipment	800,000.00	A
Less: Residual Value	90,000.00	B
Depreciable Cost	710,000.00	C=A-B
Life (Years)	5.00	D
Annual Depreciation	142,000.00	E=C/D

Answer 1	Straight line method
Year	Cost of Asset	Depreciation expense	Accumulated Deprecation	End Book Value
Year 1	800,000.00	142,000.00	142,000.00	658,000.00
Year 2	800,000.00	142,000.00	284,000.00	516,000.00
Year 3	800,000.00	142,000.00	426,000.00	374,000.00
Year 4	800,000.00	142,000.00	568,000.00	232,000.00
Year 5	800,000.00	142,000.00	710,000.00	90,000.00

Double Declining Method	Amount $	Note
Total cost	800,000.00	A
Life	5.00	B
Annual depreciation	160,000.00	C=A/B
Depreciation rate	20.00%	D=C/A
Double Depreciation %	40.00%	E=D*2

Year	Depreciable Cost	DDB Factor	Depreciation Expense	Accumulated Deprecation
Year 1	800,000.00	40.00%	320,000.00	320,000.00	480,000.00
Year 2	480,000.00	40.00%	192,000.00	512,000.00	288,000.00
Year 3	288,000.00	40.00%	115,200.00	627,200.00	172,800.00
Year 4	172,800.00	40.00%	69,120.00	696,320.00	103,680.00
Year 5	103,680.00	40.00%	41,472.00	737,792.00	62,208.00

Answer 2
Double Declining Method	Amount $
Book value of asset at the end of year 4	103,680.00
Sale value	134,570.00
Gain on sale	30,890.00

	Journal entry
Date	Account	Debit $	Credit $
4-Mar	Cash	134,570.00
	Accumulated Depreciation	696,320.00
	Gain on Sale		30,890.00
	Equipment		800,000.00

Answer 3
Double Declining Method	Amount $
Book value of asset at the end of year 4	103,680.00
Sale value	88,180.00
Loss on sale	15,500.00

	Journal entry
Date	Account	Debit $	Credit $
4-Mar	Cash	88,180.00
	Accumulated Depreciation	696,320.00
	Loss on Sale	15,500.00
	Equipment		800,000.00