Chapter 11, Problem 11.6P

1.

To determine

Depreciation:

Depreciation refers to the reduction in the monetary value of a fixed asset due to its wear and tear or obsolescence. It is a method of distributing the cost of the fixed assets over its estimated useful life.

Partial period depreciation:

Partial period depreciation is calculated when acquisition and disposal occur at different times in a fiscal year, a company must determine the depreciation, depletion, and amortization to record for the part of the year that each asset actually is used.

To Calculate: Depreciation expense on the building, machinery, and equipment for 2016.

Explanation of Solution

Company H uses straight line method of depreciation on building and machinery. Sum of the years digit method used for equipment.

Straight line method:

Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset.

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

Sum-of- the-years’ digits (SYD) method:

Sum-of-the years’ digits method determines the depreciation expense by multiplying the depreciable base and declining fraction.

Depreciation for 2016:

Depreciation on building:

$\begin{array}{c}\text{Depreciation = }\frac{\text{Cost of the Asset }-\text{ Residual value}}{\text{Estimated Useful Life of the Asset}}\times \frac{\text{Machinery used (in months)}}{\text{Number of months in a year}}\\ =\frac{\$500,000-\text{Nil}}{25\text{years}}\times \frac{9}{12}\\ =\frac{\$500,000}{\text{25 years}}\times \frac{9}{12}\\ =\$15,000\end{array}$

Depreciation on machinery:

$\begin{array}{c}\text{Depreciation = }\frac{\text{Cost of the Asset }-\text{ Residual value}}{\text{Estimated Useful Life of the Asset}}\times \frac{\text{Machinery used (in months)}}{\text{Number of months in a year}}\\ =\frac{\$240,000-\left(\$240,000\times 10\%\right)}{8\text{years}}\times \frac{9}{12}\\ =\frac{\$216,000}{\text{8 years}}\times \frac{9}{12}\\ =\$20,250\end{array}$

Depreciation on equipment is as follows:

Year	Depreciable Base  ($)		Depreciation rate per year		Number of months the asset is in service		Depreciation ($)
2016	147,000	$\times$	$\frac{6}{21}$	$\times$	$\frac{9}{12}$	=	31,500

Table (1)

Working notes:

1. Calculate the sum of the digits

$\begin{array}{c}\text{Sum-of-the-digits}=\frac{\text{n}\times \left(\text{n}+1\right)}{2}\\ =\frac{6\times \left(6+1\right)}{2}\\ =\frac{6\times 7}{2}\\ =21\end{array}$ (1)

2. Calculate the value of depreciable base

$\begin{array}{c}\text{Depreciable base = Cost of the Asset }-\text{ Residual value}\\ =\$160,000-\$13,000\\ =\$147,000\end{array}$ (2)

Hence, the depreciation expense for the year 2016 on the building, machinery, and equipment are $15,000, $20,250, and $31,500.

2.

To determine

To prepare: The journal entries to record (1) depreciation on the machinery sold on June 29, 2017, and (2) the sale of machinery.

Explanation of Solution

(1) Prepare journal entry to record depreciation on machinery sold on June 29, 2017.

Date	Account titles and explanation	Post Ref.	Debit ($)	Credit ($)
June 29, 2017	Depreciation expense		5,625
	Accumulated depreciation-machinery			5,625
	(To record the depreciation entry)

Table (2)

Working notes:

Calculate the depreciation expense on machinery.

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

$\begin{array}{c}\text{Depreciation expense = }\frac{\$100,000-\left(\$100,000\times 10\%\right)}{8\text{years}}\\ =\frac{\$100,000-\$10,000}{8}\\ =\frac{\$90,000}{8\text{years}}\\ =\$11,250\end{array}$

In 2017, the machinery is used only for 6 months that is January to June then the depreciation for 2017 is as follows:

$\begin{array}{c}\text{Depreciation}\text{expense =}\left(\begin{array}{l}\text{Annual}\\ \text{depreciation}\end{array}\right)\text{×}\frac{\text{Number}\text{of}\text{months}\text{used}}{\text{12}\text{months}}\\ =\$11,250\times \frac{6}{12}\\ =\$5,625\end{array}$

• Depreciation is an expense which decreases shareholders equity. Thus, it is debited.
• Accumulated depreciation is a contra asset which decreases assets value. Thus, it is credited.

(2) Prepare journal entry to record the sale of machinery.

Date	Account titles and explanation	Post Ref.	Debit ($)	Credit ($)
June 29, 2017	Cash		80,000
	Accumulated depreciation-machinery		14,063
	Loss on sale of machinery		5,937
	Machinery			100,000
	(To record the sale of machinery  entry)

Table (3)

Working Note:

Calculate accumulated depreciation on the machinery sold.

The machinery used for 15 months that is April 2018 to June 2019. Then the accumulated depreciation is calculated as follows:

$\begin{array}{c}\text{Accumulated depreciation = }\left(\begin{array}{l}\text{Annual }\\ \text{depreciation }\end{array}\right)\times \frac{\text{Number}\text{of}\text{months}\text{used}}{\text{12}\text{months}}\\ =\$11,250\times \frac{15}{12}\\ =\$14,063\end{array}$

Calculate the loss on sale of machinery.

$\begin{array}{c}\text{Loss on sale of machinery=}\left(\text{Cost of machinery}-\left(\text{Cash+Accumulated depreciation}\right)\right)\\ =\left(\$100,000-\left(\$80,000+\$14,063\right)\right)\\ =\$5,937\end{array}$

• Cash is a current asset which is increased by sale of asset. Thus, it is debited.
• Accumulated depreciation is a contra asset which is increasing the value of the asset. Thus, it is debited.
• Loss on sale of the asset decreases shareholders equity. Thus, it is debited.
• Machinery is an asset. It is decreased because of sale of the machinery. Thus, it is credited.

3.

To determine

To Calculate: Depreciation expense on the building, machinery, and equipment for 2017.

Explanation of Solution

Company H uses straight line method of depreciation on building and machinery. Sum of the years digit method used for equipment.

Depreciation for 2017:

Depreciation on building:

$\begin{array}{c}\text{Depreciation = }\frac{\text{Cost of the Asset }-\text{ Residual value}}{\text{Estimated Useful Life of the Asset}}\\ =\frac{\$500,000-\text{Nil}}{25\text{years}}\\ =\frac{\$500,000}{\text{25 years}}\\ =\$20,000\end{array}$

Depreciation on machinery:

$\begin{array}{c}\text{Depreciation = }\frac{\text{Cost of the Asset }-\text{ Residual value}}{\text{Estimated Useful Life of the Asset}}\\ =\frac{\$140,000-\left(\$140,000\times 10\%\right)}{8\text{years}}\\ =\frac{\$126,000}{\text{8 years}}\\ =\$15,750\end{array}$

Depreciation on equipment is as follows:

Year	Depreciable Base  ($) (2)		Depreciation rate per year (1)		Number of months the asset is in service		Depreciation ($)
2017	147,000	$\times$	$\frac{6}{21}$	$\times$	$\frac{3}{12}$	=	10,500
	147,000	$\times$	$\frac{5}{21}$	$\times$	$\frac{9}{12}$	=	26,250
Total							36,750

Table (4)

Hence, the depreciation expense for the year 2017 on the building, machinery, and equipment are $20,000, $15,750, and $36,750.