Chapter 11, Problem 17P

On December 31, 2019, Vail Company owned the following assets:

Vail computes depreciation and amortization expense to the nearest whole year. During 2020, Vail engaged in the following transactions:

Required:

1. 1. Check the accuracy of the accumulated depreciation balances at December 31, 2019. Round to the nearest whole dollar in all requirements.
2. 2. Prepare journal entries to record the preceding events in 2020, as well as the year-end recording of depreciation expense.
3. 3. Prepare an Accumulated Depreciation account for each category of assets, enter the beginning balance, post the journal entries from Requirement 2, and compute the ending balance.

To determine

Calculate the accumulated depreciation balance at December 31, 2019 for the given assets, and check it’s ‘accuracy.

Explanation of Solution

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

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

Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life is referred to as double-declining-balance method.

Calculate the accumulated depreciation balance at December 31, 2019 for the given assets, and cross check its’ accuracy as follows:

Building:

$\begin{array}{c}\text{Accumulated depreciation = }\left(\begin{array}{l}\text{Annual depreciation expense}\times \\ \text{Number of years from 2017 to 2019}\end{array}\right)\\ =\$1,250(1)\times 3\text{ years}\\ \text{=\$3,750}\end{array}$

Office machinery:

Year	Beginning book value (A)	Depreciation rate (2) (B)	Depreciation expense $\text{C = A}\times \text{B}$	Ending book value $\text{D =}\text{A}-\text{C}$
2017	20,000	20%	4,000	16,000
2018	16,000	20%	3,200	12,800
2019	12,800	20%	2,560	10,240
Total			9,760

Table (1)

Note: Ending book value of the prior year is considered as the beginning book value of current year.

Office fixtures:

Year	Depreciation base (3) (A)	Faction (4) (B)	Depreciation expense $\text{C = A}\times \text{B}$	Ending book value $\text{D =}\text{A}-\text{C}$
2017	25,000	$\frac{5}{15}$	8,333	21,667
2018	25,000	$\frac{4}{15}$	6,667	15,000
2019	25,000	$\frac{3}{15}$	5,000	10,000
Total			20,000

Table (2)

Working note (1):

Calculate the annual depreciation expense of building.

$\begin{array}{c}\text{Depreciation expense = }\frac{\text{Cost of acquisation }-\text{Residual value}}{\text{Estimated useful life}}\\ =\frac{\$50,000-\$0}{\text{40 years}}\\ =\$1,250\text{ per year}\end{array}$

Working note (2):

Compute the straight line rate:

Useful life = 10 years

$\begin{array}{c}\text{Depreciation rate}=\frac{\text{100\%}}{\text{10 years}}\times 2\\ =20\%\end{array}$

Working note (3):

Calculate the depreciable base of office fixtures.

$\begin{array}{c}\text{Depreciable base = Purchase price –Residual value }\\ \text{= \$30,000–\$5,000}\\ \text{=\$25,000}\end{array}$

Working note (4):

Calculate the denominator of the fraction for sum-of-the-year’s digit.

$\begin{array}{c}\text{Sum-of-the-digits = }\frac{\text{n}\times \left(\text{n}+1\right)}{2}\\ =\frac{5\times \left(5+1\right)}{2}\\ =\frac{5\times 6}{2}\\ =15\end{array}$

To determine

Prepare necessary journal entries for the given transaction for 2020.

Explanation of Solution

Prepare necessary journal entries for the given transaction for 2020 as follows:

Date	Account Title & Explanation	Debit ($)	Credit ($)
January 3, 2020	Building	30,000
	Cash		30,000
	(To record the purchase of building for cash)
March 8, 2020	Cash	3,000
	Accumulate depreciation-Office machinery	1,952
	Office machinery		4,000
	Gain on disposal of office machinery (5)		952
	(To record a piece of office machinery sold during the year)
May 17, 2020	Office fixtures (6)	5,640
	Office machinery (6)	3,760
	Repair expense	230
	Cash $\left(\$9,400+\$230\right)$		9,630
	(To record office fixtures and machinery purchased during the year)
August 10, 2020	Depreciation expense (7)	67
	Accumulated depreciation-Office fixtures		67
	(To record the depreciation expense incurred for office fixtures)
August 10, 2020	Office fixtures	900
	Accumulated depreciation-Office fixtures (7)	467
	Cash		700
	Office fixtures		600
	Gain on disposal of office fixtures (8)		67
	(To record the office fixtures exchanged during the year )
October 20, 2020	Repair expense	125
	Cash		125
	(To record the repair expense incurred during the year)
December 31, 2020	Depreciation expense – Building (9)	2,061
	Depreciation expense - Office machinery (14)	2,390
	Depreciation expense - Office fixtures (17)	5,064
	Accumulated depreciation-Building		2,061
	Accumulated depreciation-Office machinery		2,390
	Accumulated depreciation-Office fixtures		5,064
	(To record the depreciation expense of assets incurred at the end of the accounting year)

Table (3)

Working note (5):

Calculate the gain on disposal of office machinery.

$\begin{array}{c}\text{Gain on sale of office machinery = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Cash +}\\ \text{ Accumulated depreciation}\end{array}\right)-\\ \text{Office machinery}\end{array}\right]\\ =\left(\$3,000+\$1,952\right)-\$4,000\\ =\$952\end{array}$

Working note (6):

Calculate the cost of office fixtures and office machinery.

Particulars	Appraisal value (A)	Total appraisal value (B)	Proportion $\text{C}=\left(\frac{\text{A}}{\text{B}}\times 100\right)$	Total purchase cost (D)	Cost ($) $\text{E = C×D}$
Office fixtures	$6,000	$10,000	60%	$9,400 $\left(\begin{array}{l}\$9,200+\\ \$400\end{array}\right)$	$5,640
Office machinery	$4,000	10,000	40%	$9,400$\left(\begin{array}{l}\$9,200+\\ \$400\end{array}\right)$	$3,760
Total	$10,000		100%		$9,400

Table (4)

Working note (7):

Calculate the depreciation expense of desk.

Year	Depreciation base $\left(\$600-\$100\right)$(A)	Faction (4) (B)	Depreciation expense $\text{C = A}\times \text{B}$
2017	500	$\frac{5}{15}$	167
2018	500	$\frac{4}{15}$	133
2019	500	$\frac{3}{15}$	100
2020	500	$\frac{2}{15}$	67
Total			467

Table (5)

Working note (8):

Calculate the gain on disposal of desk.

$\begin{array}{c}\text{Gain on sale of office machinery = }\left[\begin{array}{l}\left(\begin{array}{l}\text{New desk value +}\\ \text{ Accumulated depreciation}\end{array}\right)-\\ \left(\text{Cash + Office fixtures}\right)\end{array}\right]\\ =\left(\$900+\$467\right)-\left(\$700+\$600\right)\\ =\$1,367-1,300\\ =\$67\end{array}$

Working note (9):

Calculate the depreciation expense of building at the end of the year 2020.

$\begin{array}{c}\text{Depreciation expense = }\frac{\left[\begin{array}{l}\left(\begin{array}{l}\text{Cost of building}-\\ \text{Residual value}\end{array}\right)+\\ \left(\begin{array}{l}\text{Cost of building purchased}\\ \text{ during the year}\end{array}\right)\end{array}\right]}{\text{Remaining useful life}}\\ =\frac{\left(\$50,000-\$3,750\right)+\$30,000}{\text{40 years}-\text{3 years}}\\ =\frac{\$76,250}{37}\\ =\$2,061\end{array}$

Working note (10):

Calculate the remaining office machinery at 2020.

$\begin{array}{c}\text{Remaining machinery = Office machinery at 2017}-\text{Sold on 2020}\\ \text{=\$20,000}-\$4,000\\ =\$16,000\end{array}$

Working note (11):

Calculate the depreciation expense of office machinery at the end of the year 2020.

$\begin{array}{c}\text{Depreication expense balance = }\left(\begin{array}{l}\text{Depreciatione expense on 2019}-\\ \text{Depreciation expense of sold machinery}\end{array}\right)\\ =\$9,760-\$1,952\\ =\$7,808\end{array}$

Working note (12):

Calculate the depreciation expense for remaining office machinery under double declining balance method.

$\begin{array}{c}\begin{array}{l}\text{Depreciation expense }\\ \text{for remainging office machinery}\end{array}\}=\left(\begin{array}{l}\text{Remaining office machinery}-\\ \text{Depreciation expense as of 2020}\end{array}\right)\times \text{Depreciation rate}\\ \text{=}\left[\text{\$16,000}\text{(10)}-\$7,808(11)\right]\times \frac{20}{100}(2)\\ =\$1,638\end{array}$

Working note (13):

Calculate depreciation expense of office machinery purchased during 2020 under double declining balance method.

$\begin{array}{c}\begin{array}{l}\text{Depreciation expense }\\ \text{for purchased office machinery}\end{array}\}=\text{Cost of office machinery}\times \text{Depreciation rate}\\ \text{=\$3,760 (6) }\times \frac{20}{100}(2)\\ =\$752\end{array}$

Working note (14):

Calculate total depreciation expense of office machinery at 2020.

$\begin{array}{c}\text{Depreciation expense =}\left[\begin{array}{l}\text{ Depreciation expense for remaining office machinery+}\\ \text{Depreciation expense for new machinery}\end{array}\right]\\ =\$1,638(12)+\$752(13)\\ =\$2,390\end{array}$

Working note (15):

Calculate the depreciation expense of remaining office fixtures under the sum of the year’s digit method.

$\begin{array}{c}\text{Depreciation expense =}\left[\begin{array}{l}\left(\begin{array}{l}\text{Office machinery on 2017}-\\ \text{Residual value}\end{array}\right)-\\ \left(\begin{array}{l}\text{Cost of sold fixtures}-\\ \text{Residual value}\end{array}\right)\end{array}\right]\times \text{Fraction}\\ \text{=}\left(\$30,000-\$5,000\right)-\left(\$600-\$100\right)\times \frac{2}{15}\\ =\$25,000-\$500\times \frac{2}{15}\\ =\$3,267\end{array}$

Working note (16):

Calculate the depreciation expense of new office fixtures under the sum of the year’s digit method.

$\begin{array}{c}\text{Depreciation expense = }\left(\begin{array}{l}\text{Cost of office machinery}-\\ \text{Residual value}\end{array}\right)\times \text{Fraction}\\ \text{=}\left(\text{\$5,640}-\$250\right)\times \frac{5}{15}\\ =\$1,797\end{array}$

Working note (17):

Calculate the total depreciation expense for office fixtures.

$\begin{array}{c}\text{Depreciation expense = }\left(\begin{array}{l}\text{Depreciation expense for remaining office fixtures+}\\ \text{Depreciation expense of new office fixtures}\end{array}\right)\\ =\$3,267(14)+\$1,797(15)\\ =\$5,064\end{array}$

To determine

Prepare T-account for the accumulated depreciation, and calculate the ending balance of accumulated depreciation for the given assets.

Explanation of Solution

Prepare T-account for the accumulated depreciation, and calculate the ending balance of accumulated depreciation as follows:

Accumulated depreciation - Building
		December 31, 2019	3,750
		December 31, 2019	$2,061
		Clos. Bal.	$5,811

Accumulated depreciation – Office machinery
July 3, 2020	$1,952	December 31, 2019	9,760
		December 31, 2019	$2,390
		Clos. Bal.	$10,198
Accumulated depreciation – Office mixtures
October 8, 2020	467	December 31, 2019	$20,000
		October 8, 2020	$67
		December 31, 2019	$5,064
		Clos. Bal.	$24,664