Question

In: Accounting

On June 1, a machine costing $660,000 with a 5-year life and an estimated $50,000 salvage...

On June 1, a machine costing $660,000 with a 5-year life and an estimated $50,000 salvage value was purchased. It was also estimated that the machine would produce 200,000 units during its life. Actual production would be 40,000 units per year for all five years.

1. Using the depreciation template provided, determine the amount of depreciation expense for the third year under each of the following assumptions:

   1.The company uses the straight-line method of depreciation.

   2.The company uses the units-of-production method of depreciation.

   3.The company uses the double-declining-balance method of depreciation.

2. Assuming straight line depreciation, prepare journal entry for the third year.

3. Assume the company sold the machine at the end of the fourth year for $100,000. Prepare a journal entry for asset disposal in the fourth year.

4. Assume you are the chief accountant of ABC Inc., a sheetrock manufacturer. Determine how you will choose, based on best industry practices, the depreciation method for ABC Inc. to use.

Solutions

Expert Solution

Total cost 660000
Salvage value 50000
Depreciation amount 610000
(Cost-Salvage value)
Life 5 years
Annual depreciation 122000
Dep as per SLM
Year Annual Dep Acc. Dep Cost Book value at end
1 122000 122000 660000 538000
2 122000 244000 660000 416000
3 122000 366000 660000 294000
4 122000 488000 660000 172000
5 122000 610000 660000 50000
Dep as unit of production
Depreciable amount 610000
Units of production 200000
Depreciation pr unit produced 3.05
Annual production 40000
Annual depreciation 122000
Year Annual Dep Acc. Dep Cost Book value at end
1 122000 122000 660000 538000
2 122000 244000 660000 416000
3 122000 366000 660000 294000
4 122000 488000 660000 172000
5 122000 610000 660000 50000
Dep as per DDB
Rate of SLM ( 100/5) 20%
Rate of DDB (20*2) 40%
Year Annual Dep Acc. Dep Cost Book value at end
1 264000 264000 660000 396000
2 158400 422400 660000 237600
3 95040 517440 660000 142560
4 57024 574464 660000 85536
5 35536 610000 660000 50000
Req 2:
Journal entry
yr-2 Depreciation expense Account Dr. 122000
    Accumulated depreciation 122000
Req 3:
Accumulated dep Account Dr. 488000
Cash Account Dr. 100000
Loss on sale of assets 72000
       Machine account 660000
Req4: Units of production shall be used, as it gives reliability over accuracy of depreciation expene due to actual usage based.

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