Concept explainers
1. (a)
Straight-line
Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:
Double-declining-balance method:
It is an accelerated method of depreciation under which the depreciation declines in each successive year until the value of asset becomes zero. Under this method, the book value (original cost less
the annual depreciation expense, accumulated depreciation, and the book value for each of the estimated five years of use by the straight-line method.
1. (a)
Explanation of Solution
Determine the annual depreciation expense, accumulated depreciation, and the book value by straight-line method.
Year | Depreciation Expense (1) | Accumulated Depreciation, End of Year | Book Value, End of Year |
Year 1 | $142,000 | $142,000 | $658,000 |
Year 2 | $142,000 | $284,000 | $516,000 |
Year 3 | $142,000 | $426,000 | $374,000 |
Year 4 | $142,000 | $568,000 | $232,000 |
Year 5 | $142,000 | $710,000 | $90,000 |
Table (1)
Working notes:
Cost of the equipment= $800,000
Estimated residual value =$90,000
Estimated Useful Life =5 years
Notes (1):
Accumulated Depreciation for the current year is the sum total of the previous years’ depreciation expense.
Book value is the difference between the cost of the asset and the accumulated depreciation.
(b)
the annual depreciation expense, accumulated depreciation, and the book value for each of the estimated five years of use by double-declining-balance method.
(b)
Explanation of Solution
Determine the annual depreciation expense, accumulated depreciation, and the book value by double-declining-balance method.
Year | Depreciation Expense | Accumulated Depreciation, End of Year | Book Value, End of Year |
Year 1 | $320,000 | $420,000 | |
Year 2 | $512,000 | $288,000 | |
Year 3 | $627,200 | $172,800 | |
Year 4 | $696,320 | $103,680 | |
Year 5 | $13,680 (2) | $710,000 | $90,000 |
Table (2)
Notes (2):
Accumulated depreciation is the sum total of the previous years’ depreciation expense.
Book value is the difference between the cost of the asset and the accumulated depreciation.
The depreciation expense should not exceed the residual value of $90,000. Thus, it should be adjusted to make the book value of the equipment (cost less accumulated depreciation) equal to its residual value. Thus, the depreciation expense for Year 5 would be
2.
To
2.
Explanation of Solution
Journalize: the entry to record the sale under the double-declining-balance method.
Date | Account Title and Explanation | Post Ref | Debit ($) |
Credit ($) |
Cash | 135,000 | |||
Accumulated depreciation-Equipment | 696,320 | |||
Equipment | 800,000 | |||
Gain on Sale of Equipment | 31,320 | |||
(To record the sale of equipment.) |
Table (3)
Working note:
Calculate the gain or (loss) on the sale of equipment.
Title: Calculate the gain (loss) on sale of equipment | ||
Details | Amount ($) | Amount ($) |
Cash received on sale of equipment | 135,000 | |
Less: | ||
Cost of the equipment | 800,000 | |
Less: Accumulated Depreciation | (696,320) | |
Book Value of the equipment | (103,680) | |
Gain on sale of equipment | 31,320 |
Table (4)
- Cash is an asset, and it is increased by $135,000. Therefore, debit cash with $135,000.
- Accumulated depreciation-Equipment is a contra-asset with a normal credit balance. The decrease in accumulated depreciation increases the asset by $696,320. Therefore, debit Accumulated depreciation – Equipment by $696,320.
- Gain on Sale of Equipment is a gain for the company, and it increases the
stockholder’s equity by $31,320. Therefore, credit Gain on Sale of Equipment by $31,320.
- Equipment is an asset, and it is decreased by $800,000. Therefore, credit Equipment account by $800,000.
3.
To journalize: the entry to record the sale of equipment for $88,750 under the double-declining-balance method.
3.
Explanation of Solution
Journalize: the entry to record the sale under the double-declining-balance method.
Date | Account Title and Explanation | Post Ref | Debit ($) |
Credit ($) |
Cash | 88,750 | |||
Accumulated depreciation-Equipment | 696,320 | |||
Loss on Sale of Equipment | 14,930 | |||
Equipment | 800,000 | |||
(To record the sale of equipment.) |
Table (5)
Working note:
Calculate the gain or (loss) on the sale of equipment.
Title: Calculate the gain (loss) on sale of equipment | ||
Details | Amount ($) | Amount ($) |
Cash received on sale of equipment | 88,750 | |
Less: | ||
Cost of the equipment | 800,000 | |
Less: Accumulated Depreciation | (696,320) | |
Book Value of the equipment | (103,680) | |
Loss on sale of equipment | (14,930) |
Table (6)
- Cash is an asset, and it is increased by $88,750. Therefore, debit cash with $88,750.
- Accumulated depreciation-Equipment is a contra-asset with a normal credit balance. The decrease in accumulated depreciation increases the asset by $696,320. Therefore, debit Accumulated depreciation – Equipment by $696,320.
- Loss on Sale of Equipment is a loss for the company, and it decreases the stockholder’s equity by $14,930. Therefore, debit Loss on Sale of Equipment by $14,930.
- Equipment is an asset, and it is decreased by $800,000. Therefore, credit Equipment account by $800,000
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Chapter 10 Solutions
Accounting (Text Only)
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