Question

Depreciation by Two Methods; Sale of Fixed Asset

New lithographic equipment, acquired at a cost of $656,250 on March 1 of Year 1 (beginning of the fiscal year), has an estimated useful life of five years and an estimated residual value of $56,400. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year.

On March 4 of Year 5, the equipment was sold for $96,100.

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	$	$	$

Feedback

Asset cost minus residual value equals depreciable cost. Sum the yearly depreciation to determine total depreciation.

In the first year, the balance in the accumulated depreciation account is zero. Remember not to reduce book value below residual value.

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

	Cash
	Accumulated Depreciation-Equipment
	Equipment
	Gain on Sale of Equipment

Feedback

Determine the book value at the point of sale. Compare the book value amount to the sale price. If the book value is less than the sale price, the asset was sold for a gain. If the book value is more than the sale price, the equipment was sold for a loss. If you no longer own the asset what accounts would need to be eliminated?

3. Journalize the entry to record the sale in (2) assuming that the equipment was sold for $82,500 instead of $96,100. If an amount box does not require an entry, leave it blank.

	Cash
	Accumulated Depreciation-Equipment
	Loss on Sale of Equipment
	Equipment

Answer 1

1a. Straight-line method :-

Year	Depreciation Expense	Accumulated Depreciation, End of Year	Book Value, End of Year
1	$119970	$119970	$536280
2	$119970	$239940	$416310
3	$119970	$359910	$296340
4	$119970	$479880	$176370
5	$119970	$599850	$56400

*Depreciation = (Cost – Residual Value)/Life

                   = ($656250 - $56400)/5 years = $119970

1b. Double-declining-balance method :-

Year	Depreciation Expense	Accumulated Depreciation, End of Year	Book Value, End of Year
1	($656250 * 40%) = $262500	$262500	$393750
2	($393750 * 40%) = $157500	$420000	$236250
3	($236250 * 40%) = $94500	$514500	$141750
4	($141750 * 40%) = $56700	$571200	$85050
5	28650	$599850	$56400

Rate of Depreciation for Double Declining = (1/Life) * 2

                 = (1/5 Years) * 2 = 40%

(2)

Cash	$96100
Accumulated Depreciation-Equipment	$571200
Equipment		$656250
Gain on Sale of Equipment		$11050

(3)

Cash	$82500
Accumulated Depreciation-Equipment	$571200
Loss on Sale of Equipment	$2550
Equipment		$656250