Chapter 10, Problem 10.4APR

1. (a)

To determine

Straight-line Depreciation:

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:

$\text{Depreciation}\text{=}\frac{\text{Cost}\text{of the asset}-\text{Residual}\text{value}}{\text{Estimated}\text{useful life of the asset}}$

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 accumulated depreciation) of the long-term asset is decreased by a fixed rate. It is double the rate of the straight-line depreciation. Use the following formula to determine the annual depreciation:

$\text{Depreciation}\text{=}\text{Purchase}\text{Price}\times \left(\frac{2}{\text{Useful life}}\right)$

the annual depreciation expense, accumulated depreciation, and the book value for each of the estimated five years of use by the straight-line method.

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

$\begin{array}{c}\text{Depreciation}\text{=}\left(\frac{\text{Cost}-\text{Residual}\text{value}}{\text{Estimated}\text{useful life}}\right)\\ =\left(\frac{\$800,000-\$90,000}{5\text{years}}\right)\\ =\frac{\$710,000}{5}\\ =\$142,000\end{array}$

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)

To determine

the annual depreciation expense, accumulated depreciation, and the book value for each of the estimated five years of use by double-declining-balance method.

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	$\$320,000\left(\$800,000\times \frac{2}{5}\right)$	$320,000	$420,000
Year 2	$\$192,000\left(\$480,000\times \frac{2}{5}\right)$	$512,000	$288,000
Year 3	$\$115,200\left(\$288,000\times \frac{2}{5}\right)$	$627,200	$172,800
Year 4	$\$69,120\left(\$172,800\times \frac{2}{5}\right)$	$696,320	$103,680
Year 5	$13,680 (2)	$710,000	$90,000

Table (2)

$\$13,680\left(\$103,680-\$90,000\right)$

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 $\$13,680\left(\$103,680-\$90,000\right)$.

2.

To determine

To journalize: the entry to record the sale of equipment for $135,000 under the double-declining-balance method.

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 determine

To journalize: the entry to record the sale of equipment for $88,750 under the double-declining-balance method.

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