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. The following is the formula to calculate the depreciation.

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

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 2018.

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.

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

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.

$\begin{array}{c}\text{Depreciation}\text{expense}\text{=}\{\begin{array}{l}\text{Cost of the asset }\times \left(\begin{array}{l}\text{Number of years of}\\ \text{estimated life remaining }\\ \text{at the beginning of the year}\end{array}\right)\begin{array}{l}\text{÷}\text{SYD}\hfill \end{array}\\ \end{array}\\ \text{SYD}\text{=}\frac{\text{n}\left(\text{n+1}\right)}{\text{2}}\end{array}$

Where n is estimated life time of the asset.

Depreciation for 2018:

Depreciation on building and machinery:

Asset	Cost of the  asset($)	Residual value ($)	Rate of depreciation (1)	Annual depreciation ($)
Building	500,000	0	4%	20,000
Machinery	240,000	24,000	12.50%	27,000

Table (1)

Depreciation on equipment is as follows

$\begin{array}{c}\text{Depreciation}\text{expense}\text{=}\{\begin{array}{l}\text{Cost of the asset }\times \left(\begin{array}{l}\text{Number of years of}\\ \text{estimated life remaining }\\ \text{at the beginning of the year}\end{array}\right)\begin{array}{l}\text{÷}\text{SYD*}\hfill \end{array}\\ \end{array}\\ =\left(\$160,000-\$13,000\right)\times \frac{6}{21}\\ =\$157,000\times \frac{6}{21}\\ =\$42,000\end{array}$

Building, machinery and equipment are used only for 9 months in 2018 that is April to December then the depreciation for 2018 is as follows

$\text{Depreciation}\text{expense =}\left(\begin{array}{l}\text{Annual}\\ \text{depreciation}\end{array}\right)\text{×}\frac{\text{Number}\text{of}\text{months}\text{used}}{\text{12}\text{months}}$

Depreciation on building is $15,000 $\left(\$20,000\times \frac{9}{12}\right)$, depreciation on machinery is $20,250 $\left(\$27,000\times \frac{9}{12}\right)$ and depreciation on equipment is $31,000 $\left(\$42,000\times \frac{9}{12}\right)$

Working notes:

(1) Calculate the rate of depreciation for building and machinery.

Rate of Depreciation for building

$\begin{array}{c}\text{Depreciation rate = }\frac{\text{1}}{\text{estimated life of the asset}}\\ =\frac{1}{25}\\ =.04\text{or}\text{4\%}\end{array}$

Rate of Depreciation for machinery

$\begin{array}{c}\text{Depreciation rate = }\frac{\text{1}}{\text{estimated life of the asset}}\\ =\frac{1}{8}\\ =0.125\text{or1}2.5\text{\%}\end{array}$

*Calculate SYD value

$\begin{array}{c}\text{SYD}\text{=}\frac{\text{n}\left(\text{n+1}\right)}{\text{2}}\\ =\frac{6\left(6+1\right)}{2}\\ =\frac{42}{2}\\ =21\end{array}$

(2)

To determine

To prepare: The journal entries to record (1) depreciation on the machinery sold on June 29, 2019, and (2) the sale of machinery.

Explanation of Solution

(1) Prepare journal entry to record depreciation on machinery sold on June 29, 2019.

Date	Account titles and explanation	Post Ref.	Debit ($)	Credit ($)
June 29 2019	Depreciation expense    (1)		5,625
	Accumulated depreciation-machinery			5,625
	(To record the depreciation entry)

Table (2)

• 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 2019	Cash		80,000
	Accumulated depreciation-machinery  (2)		14,063
	Loss on sale of machinery                                         (balancing figure)		5,937
	Machinery			100,000
	(To record the sale of machinery  entry)

Table (3)

• 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.

Working notes:

(1) Calculate the depreciation expense on machinery.

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

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

In 2019, the machinery is used only for 6 months that is January to June then the depreciation for 2019 is as follows

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

(2) 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:

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

(3)

To determine

To calculate: The depreciation on building, machinery and equipment for 2019.

Explanation of Solution

Depreciation on building and machinery for 2019

Asset	Cost of the  asset($)	Residual value ($)	Rate of depreciation (1)	Annual depreciation ($)
Building	500,000	0	4%	20,000
Machinery	140,000	14,000	12.50%	15,750

Table (4)

• Machinery was sold during 2019, $100,000. Remaining machinery value is $140,000 and the residual value on machinery is 10% on the book value.
• Depreciation on building for 2019 is $20,000.

Compute depreciation on equipment for 2019 using sum of the year’s digit method

For first 3 months:

$\begin{array}{c}\text{Depreciation expense =} \left(\$160,000–13,000\right)\times \frac{6}{21}\times \frac{3}{12}\\ =\$42,000\times \frac{3}{12}\\ =\$10,500\end{array}$

For remaining 9 months:

$\begin{array}{c}\text{Depreciation expense =} \left(\$160,000–13,000\right)\times \frac{5}{21}\times \frac{9}{12}\\ =\$35,000\times \frac{9}{12}\\ =\$26,250\end{array}$

Deprecation for 2019 is as follows:

$\begin{array}{c}\text{Deprecation for 2019 =}\text{first 3 months + remaining 9 months}\\ \text{=}\text{\$10,500}\text{+}\text{\$26250}\\ \text{=}\text{\$36,750}\end{array}$

Therefore depreciation on equipment for 2019 is $36,750.

Conclusion

In 2019, depreciation on building is $20,000; on machinery is $15,750 and on equipment is $36,750.