Chapter 11, Problem 11.9P

Straight-line depreciation; disposal; partial period; change in estimate

• LO11–2, LO11–5

The property, plant, and equipment section of the Jasper Company’s December 31, 2017, balance sheet contained the following:

Property, plant, and equipment:
Land		$120,000
Building	$ 840,000
Less: Accumulated depreciation	(200,000)	640,000
Equipment	180,000
Less: Accumulated depreciation	?	?
Total property, plant, and equipment		?

The land and building were purchased at the beginning of 2013. Straight-line depreciation is used and a residual value of $40,000 for the building is anticipated.

The equipment is comprised of the following three machines:

The straight-line method is used to determine depreciation on the equipment. On March 31, 2018, Machine 102 was sold for $52,500. Early in 2018, the useful life of machine 101 was revised to seven years in total, and the residual value was revised to zero.

Required:

1. Calculate the accumulated depreciation on the equipment at December 31, 2017.

2. Prepare the journal entry to record 2018 depreciation on machine 102 up to the date of sale.

3. Prepare a schedule to calculate the gain or loss on the sale of machine 102.

4. Prepare the journal entry for the sale of machine 102.

5. Prepare the 2018 year-end journal entries to record depreciation on the building and equipment.

To determine

Depreciation:

The decrease in the value of fixed tangible assets due to its use is known as depreciation. It is the allocation of the cost of tangible fixed assets over the useful life of the asset.

To calculate: The accumulated depreciation on the equipment at December 31, 2017.

Explanation of Solution

Company J using straight line method of depreciation:

Straight-line method: It is a method of providing depreciation. In this method, depreciation is calculated as the fixed percentage of the original cost of the fixed asset. The amount of depreciation in this method remains same for all the years of the useful life of the asset. Therefore, the following formula is used to calculate depreciation of asset.

$\text{Depreciation = }\frac{\text{Cost of the Asset }-\text{ Residual value}}{\text{Estimated Useful Life of the Asset}}$

To calculate: The accumulated depreciation on the equipment at December 31, 2017.

Asset	Cost at 2016 ($)	Estimated residual value	Estimated life of the asset	Number of years   used	Accumulated  depreciation ($)
(1)	(2)	(2a)	(3)	(4)	(5) = $\left[\left(2-2\text{a}\right)÷\left(3\right)\right]\times \left(4\right)$
101	70	7000	10years	36	18,900
102	80	8000	8 years	18	13,500
103	30	3000	9 years	4	1,000
Accumulated depreciation on 31, December 2017					33,400

Table (1)

To determine

To prepare: The journal entry to record the depreciation machine 102 up to the date of sale.

Explanation of Solution

Prepare a journal entry to record the depreciation on equipment 102.

Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
Depreciation expense (1)		2,250
Accumulated Depreciation			2,250
(To record the depreciation on equipment 102.)

Table (2)

Working note:

(1) Calculate the depreciation on equipment 102 up to the date of sale.

$\begin{array}{c}\text{Depreciation = }\frac{\text{Cost of the Asset }-\text{ Residual value}}{\text{Estimated Useful Life of the Asset}}\times \frac{\text{Number}\text{of}\text{months}}{12\text{months}}\\ =\frac{\$80,000-\$8,000}{8\text{years}}\times \frac{3}{12}\\ \text{=}\frac{\$72,000}{8\text{years}}\times \frac{3}{12}\\ \text{=\$2,250}\end{array}$

Therefore depreciation up to the date of sale is $2,250.

To determine

To prepare: A schedule to calculate the gain or loss on the sale of machine 102.

Explanation of Solution

Prepare a schedule to calculate the gain or loss on sale of machine 102.

Particulars	Amount ($)	Amount ($)	Amount ($)
Sales proceeds			52,500
Less: Book value on 31/03/18
Cost		80,000
Accumulated depreciation		(15,750)	64,250
Loss on sale of equipment 102			11,750

Table (2)

Calculate the accumulated depreciation

Particulars	Amount $
Depreciation through 31/12/17	13,500
Depreciation from 1/1/18 to 31/3/18	2,250
Accumulated depreciation	15,750

Table (3)

To determine

To prepare: The journal entry for the sale of machine 102.

Explanation of Solution

Prepare the journal entry for the sale of machine 102.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
31/03/2018	Cash		52,500
	Accumulated depreciation		15,750
	Loss on sale of the equipment 102		11,750
	Equipment 102			80,000
	(To record the sale of equipment 102.)

Table (4)

• Cash is a current asset and increased due to sale of equipment 102. Thus, debit Cash account with $52,500.
• Accumulated depreciation is a contra asset. It increases the value of asset account. Thus, debit Accumulated Depreciation with $15,750.
• Loss on sale of equipment 102 decreases the value of shareholders equity. Thus, debit Loss on sale of equipment 102 with $11,750.
• Equipment 102 is an asset and decreases value of the assets due to sale. Thus, credit Equipment 102 with $80,000.

To determine

To prepare: The 2018 year-end journal entries to record depreciation on the building and equipment.

Explanation of Solution

Prepare a journal entry to record the depreciation on building.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
31/12/2018	Depreciation expense  (1)		40,000
	Accumulated Depreciation – Building			40,000
	(To record the depreciation.)

Table (5)

• Depreciation is an expense which decreases shareholders equity. Thus, debit Depreciation expense account with $40,000.
• Accumulated depreciation is a contra asset. It decreases the value of asset. Thus, credit accumulated depreciation with $40,000.

Working notes:

Determine the depreciation per year.

 The land and building were purchased at the beginning of 2013. Straight-line depreciation is used and a residual value of $40,000 for the building is anticipated.

$\begin{array}{c}\text{Accumulated}\text{depreciation = Depreciation per year }\times \text{Number of years }\\ \$200,000=\text{ Depreciation per year}\times 5\text{years}\\ \text{Depreciation per year = }\frac{\$200,000}{5\text{years}}\\ \text{ = \$40,000}\end{array}$

Therefore annual depreciation on building is $40,000.

Prepare a journal entry to record the depreciation on equipment.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation expense  (2)		15,775
	Accumulated Depreciation			15,775
	(To record the depreciation.)

Table (6)

• Depreciation expense which decreases shareholders equity. Thus, debit Depreciation expense with $15,775.
• Accumulated depreciation is a contra asset. It decreases the value of asset. Thus, credit accumulated depreciation with $15,775.

Working note:

Compute the deprecation on equipments.

Particulars	Amount ($)	Amount ($)
Equipment  101
Cost	70,000
Less: Accumulated depreciation	18,900
Book value, 12/31/17	51,100
Revised remaining life (7 years – 3 years)	$÷$4 years	12,775
Equipment  103 (requirement 1)		3,000
Depreciation		15,7775

Table (7)

Therefore depreciation on equipment’s is $15,775.