Question

On March 31, 2021, the Herzog Company purchased a factory complete with vehicles and equipment. The allocation of the total purchase price of $960,000 to the various types of assets along with estimated useful lives and residual values are as follows: Asset Cost Estimated Residual Value Estimated Useful Life (in years) Land $ 120,000 N/A N/A Building 460,000 none 25 Equipment 260,000 10% of cost 6 Vehicles 120,000 $ 15,000 10 Total $ 960,000 On June 29, 2022, equipment included in the March 31, 2021, purchase that cost $96,000 was sold for $76,000. Herzog uses the straight-line depreciation method for building and equipment and the double-declining-balance method for vehicles. Partial-year depreciation is calculated based on the number of months an asset is in service.

Required: 1. Compute depreciation expense on the building, equipment, and vehicles for 2021.

2. Prepare the journal entries to record the depreciation on the equipment sold on June 29, 2022, and the sale of equipment.

3. Compute depreciation expense on the building, remaining equipment, and vehicles for 2022.

Answer 1

1. Computation of Depreciation Expense on the Building,Equipment and Vehicles for 2021 :

Depreciation on Building = [(Cost-Residual value)/Useful Life]*9/12 =[ ($460000-0)/25 years]*9/12= $13800

Depreciation on Equipment =[ ($260000-260000*10%)/6 years]*9/12= $29250

Depreciation on Vehicle =[2* ($120000/10 years)*9/12]= $18000

Note :Double Decline method = 2 x basic depreciation rate x book value.Your basic depreciation rate is the rate at which an asset depreciates using the straight line method.

2.  Journal entries to record the depreciation on the equipment sold on June 29, 2022, and the sale of equipment :

Depreciation Expense =[ ($96000-96000*10%)/6 years]*6/12 = $7200

Accumulated Depreciation on Equipment Sold on June 29,2022 :

Depreciation of 2021 = [($96000-96000*10%)/6 years]*9/12 = $10800

Depreciation of 2022 = $10800 +$7200 =$18000

Journal Entries :

Debit : Depreciation $7200
Credit : Accumulated Depreciation $7200
Debit : Cash $76000
Debit : Accumulated Depreciation $18000
Credit : Equipment $96000

3. Computation of Depreciation Expense on the Building,Equipment and Vehicles for 2022 :

Depreciation on Building =$460000/25 years*12/12= $18400

Depreciation on Equipment = ($260000-96000)-(164000*10%)/6 years]*12/12= $24600

Depreciation on Vehicle =2* [($120000-$18000)/10 years]*12/12= $20400