Question

New lithographic equipment, acquired at a cost of $800,000 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 $90,000. 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 $135,000.

	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 (a) the straight-line method and (b) the double-declining-balance method.
2.	Journalize the entry to record the sale assuming that the manager chose the double-declining-balance method.
3.	Journalize the entry to record the sale in (2) assuming that the equipment was sold for $88,750 instead of $135,000. CHART OF ACCOUNTS General Ledger ASSETS 110 Cash 111 Petty Cash 112 Accounts Receivable 114 Interest Receivable 115 Notes Receivable 116 Merchandise Inventory 117 Supplies 119 Prepaid Insurance 120 Land 123 Delivery Truck 124 Accumulated Depreciation-Delivery Truck 125 Equipment 126 Accumulated Depreciation-Equipment 130 Mineral Rights 131 Accumulated Depletion 132 Goodwill 133 Patents LIABILITIES 210 Accounts Payable 211 Salaries Payable 213 Sales Tax Payable 214 Interest Payable 215 Notes Payable EQUITY 310 Common Stock 311 Retained Earnings 312 Dividends 313 Income Summary REVENUE 410 Sales 610 Interest Revenue 620 Gain on Sale of Delivery Truck 621 Gain on Sale of Equipment EXPENSES 510 Cost of Merchandise Sold 520 Salaries Expense 521 Advertising Expense 522 Depreciation Expense-Delivery Truck 523 Delivery Expense 524 Repairs and Maintenance Expense 529 Selling Expenses 531 Rent Expense 532 Depreciation Expense-Equipment 533 Depletion Expense 534 Amortization Expense-Patents 535 Insurance Expense 536 Supplies Expense 539 Miscellaneous Expense 710 Interest Expense 720 Loss on Sale of Delivery Truck 721 Loss on Sale of Equipment 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 (a) the straight-line method and (b) the double-declining-balance method. a. Straight-line method Accumulated Depreciation, Year Depreciation Expense End of Year Book Value, End of Year 1 2 3 4 5 b. Double-declining-balance method Accumulated Depreciation, Year Depreciation Expense End of Year Book Value, End of Year 1 2 3 4 5 2. On March 4, journalize the entry to record the sale assuming that the manager chose the double-declining-balance method. Refer to the Chart of Accounts for exact wording of account titles. PAGE 1 JOURNAL ACCOUNTING EQUATION DATE DESCRIPTION POST. REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY 1 2 3 4 3. On March 4, journalize the entry to record the sale in (2) assuming that the equipment was sold for $88,750 instead of $135,000. Refer to the Chart of Accounts for exact wording of account titles. PAGE 1 JOURNAL ACCOUNTING EQUATION DATE DESCRIPTION POST. REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY 1 2 3 4

Answer 1

1(a)

Year	Depreciable Cost	x	Depreciation Rate	=	Annual Depreciation Expense	End of Year
						Accumulated Depreciation	Book Value
								1	710000		20%		142000	142000	658000
2	710000		20%		142000	284000	516000
3	710000		20%		142000	426000	374000
4	710000		20%		142000	568000	232000
5	710000		20%		142000	710000	90000

Depreciable cost = Cost - Salvage value = $800000 - $90000 = $710000

Annual Depreciation Rate = 100% / Life in years = 100% / 5 years = 20%

Annual Depreciation Expense = Depreciable cost x Annual Depreciation Rate

1(b)

Year	Book Value Beginning of Year	x	Depreciation Rate	=	Annual Depreciation Expense	End of Year
						Accumulated Depreciation	Book Value
								1	800000		40%		320000	320000	480000
2	480000		40%		192000	512000	288000
3	288000		40%		115200	627200	172800
4	172800		40%		69120	696320	103680
5	103680				13680	710000	90000

Straight-line Depreciation Rate = 20%

Double Declining balance depreciation rate = 20% x 200% = 40%

2	DATE	DESCRIPTION	POST.REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1	Mar. 4, Year 5	Cash		135000		135000
2		Accumulated depreciation-equipment		696320		696320
3		Equipment			800000	-800000
4		Gain on sale of equipment			31320			31320

3	DATE	DESCRIPTION	POST.REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1	Mar. 4, Year 5	Cash		88750		88750
2		Accumulated depreciation-equipment		696320		696320
3		Loss on sale of equipment		14930				-14930
4		Equipment			800000	-800000