Question

On January 1, Golden Sales bought $135,000 in fixed assets associated with sales equipment. The residual value of these assets is estimated at $10,000 at the end of their 4-year service life. Golden Sales managers want to evaluate the options of depreciation.

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a. Compute the annual straight-line depreciation, and journalize the sample depreciation entry to be recorded at the end of each of the 4 years.

b. Compute the double-declining-balance depreciation, and journalize the depreciation entries to be recorded at the end of each of the 4 years.

Please type out no handwriting. Thank you

Answer 1

Answer :

a. Straight-line depreciation method :

Annual depreciation = (Cost - Salvage value) / Useful life

= ($135,000 - $10,000) / 4 years

= $31,250

Journal entry :

Date	Account title and Explanations	Debit	Credit
Year 1	Depreciation Expense	$31,250
	Accumulated Depreciation-Fixed Assets		$31,250
	(same entry is passed for 4 years)

b. Double-declining-balance depreciation method :

Depreciation rate

= 100% / 4 years x 2

= 50%

Date	Account title and Explanations	Debit	Credit
Year 1	Depreciation Expense ($135,000 x 50%)	$67,500
	Accumulated Depreciation-Fixed Assets		$67,500
	(Book value is now 135,000 - 67,500 = 67,500)
Year 2	Depreciation Expense ($67,500 x 50%)	$33,750
	Accumulated Depreciation-Fixed Assets		$33,750
	(Book value is now 67,500 - 33,750 = 33,750)
Year 3	Depreciation Expense ($33,750 x 50%)	$16,875
	Accumulated Depreciation-Fixed Assets		$16,875
	(Book value is now 33,750 - 16,875 = 16,875)
Year 4	Depreciation Expense (Note - 1)	$6,875
	Accumulated Depreciation-Fixed Assets		$6,875
	(Book value is now 16,875 - 6,875 = $10,000 (same as residual value)

Note 1 :

Since this is the last year of depreciation and the book value is not allowed to drop below the residual value ($10,000) in double declining depreciation method. Hence, the depreciation expense for this last year is $6,875.