Chapter 7, Problem 1AE

(a)

To determine

Calculate depreciation expense, accumulated depreciation, and book value for each of the six years using straight line method and record the adjusting entry for depreciation expense at the end of the third year under each method.

Explanation of Solution

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. The following is the formula to calculate the depreciation.

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

Determine depreciation expense, accumulated depreciation, and book value at the end of sixth year under straight line depreciation method.

Table (1)

Hence, the depreciation expense, accumulated depreciation, and book value at the end of the sixth year, under straight line method are $12,000, $72,000 and $24,000 respectively.

Record the adjusting entry for depreciation expense at the end of the third year under straight line depreciation method.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation expense – Equipment (Refer table (1))		12,000
	Accumulated depreciation -Equipment			12,000
	(To record the depreciation expense)

Table (2)

To record the adjusting entry for depreciation expense at the end of the third year:

• Depreciation expense is an expense (decreases the stockholders’ equity) and it is increased by $12,000. Therefore, debit depreciation account with $12,000.
• Accumulated depreciation is a contra-asset. Increase in the accumulated depreciation account decreases the related asset account. Therefore, credit accumulated depreciation account with $12,000.

Working Note:

The above calculation is computed using spreadsheet as follows:

Table (3)

(b)

To determine

Calculate depreciation expense, accumulated depreciation, and book value for each of the six years using double-declining-balance method and record the adjusting entry for depreciation expense at the end of the third year under each method.

Explanation of Solution

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.

Determine depreciation expense, accumulated depreciation, and book value at the end of sixth year under double declining balance method.

Table (4)

Hence, the depreciation expense, accumulated depreciation, and book value at the end of the sixth year, under double declining balance method are $0, $72,000 and $24,000 respectively.

Record the adjusting entry for depreciation expense at the end of the third year under double declining balance method.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation expense – Equipment (Refer table (4))		14,222
	Accumulated depreciation -Equipment			14,222
	(To record the depreciation expense)

Table (5)

To record the adjusting entry for depreciation expense at the end of the third year:

• Depreciation expense is an expense (decreases the stockholders’ equity) and it is increased by $14,222. Therefore, debit depreciation account with $14,222.
• Accumulated depreciation is a contra-asset. Increase in the accumulated depreciation account decreases the related asset account. Therefore, credit accumulated depreciation account with $14,222.

Working Note:

The above calculation is computed using spreadsheet as follows:

Table (6)

(c)

To determine

Calculate depreciation expense, accumulated depreciation, and book value for each of the six years using activity-based method and record the adjusting entry for depreciation expense at the end of the third year under each method.

Explanation of Solution

Activity based method: In this method of depreciation, the amount of depreciation is charged based on the units of production each year.

Determine depreciation expense, accumulated depreciation, and book value at the end of sixth year under activity based method.

Table (7)

Hence, the depreciation expense, accumulated depreciation, and book value at the end of the sixth year, under activity based method are $10,473, $72,000 and $24,000 respectively.

Record the adjusting entry for depreciation expense at the end of the third year under activity based method.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation expense – Equipment (Refer table (7))		14,400
	Accumulated depreciation -Equipment			14,400
	(To record the depreciation expense)

Table (8)

To record the adjusting entry for depreciation expense at the end of the third year:

• Depreciation expense is an expense (decreases the stockholders’ equity) and it is increased by $14,400. Therefore, debit depreciation account with $14,400.
• Accumulated depreciation is a contra-asset. Increase in the accumulated depreciation account decreases the related asset account. Therefore, credit accumulated depreciation account with $14,400.

Working Note:

The above calculation is computed using spreadsheet as follows:

Table (9)

To determine

Calculate depreciation expense, accumulated depreciation, and book value for each of the fifth years using (a) straight-Line, (b) double-declining-balance, and (c) activity-based if the company had initially estimated the residual value to be $16,000 and the useful life to be five years.

Explanation of Solution

(a)

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. The following is the formula to calculate the depreciation.

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

Determine depreciation expense, accumulated depreciation, and book value at the end of sixth year under straight line depreciation method.

Table (10)

Hence, the depreciation expense, accumulated depreciation, and book value at the end of the sixth year, under straight line method are $16,000, $80,000 and $16,000 respectively.

Record the adjusting entry for depreciation expense at the end of the third year under straight line depreciation method.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation expense – Equipment (Refer table (10))		16,000
	Accumulated depreciation -Equipment			16,000
	(To record the depreciation expense)

Table (11)

To record the adjusting entry for depreciation expense at the end of the third year:

• Depreciation expense is an expense (decreases the stockholders’ equity) and it is increased by $16,000. Therefore, debit depreciation account with $16,000.
• Accumulated depreciation is a contra-asset. Increase in the accumulated depreciation account decreases the related asset account. Therefore, credit accumulated depreciation account with $16,000.

Working Note:

The above calculation is computed using spreadsheet as follows:

Table (12)

(b)

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.

Determine depreciation expense, accumulated depreciation, and book value at the end of sixth year under double declining balance method.

Table (13)

Hence, the depreciation expense, accumulated depreciation, and book value at the end of the fifth year, under s double declining balance method are $0, $80,000 and $16,000 respectively.

Record the adjusting entry for depreciation expense at the end of the third year under double declining balance method.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation expense – Equipment (Refer table (13))		13,824
	Accumulated depreciation -Equipment			13,824
	(To record the depreciation expense)

Table (14)

To record the adjusting entry for depreciation expense at the end of the third year:

• Depreciation expense is an expense (decreases the stockholders’ equity) and it is increased by $13,824. Therefore, debit depreciation account with $13,824.
• Accumulated depreciation is a contra-asset. Increase in the accumulated depreciation account decreases the related asset account. Therefore, credit accumulated depreciation account with $13,824.

Working Note:

The above calculation is computed using spreadsheet as follows:

Table (15)

(c)

Activity based method: In this method of depreciation, the amount of depreciation is charged based on the units of production each year.

Determine depreciation expense, accumulated depreciation, and book value at the end of sixth year under activity based method.

Table (16)

Hence, the depreciation expense, accumulated depreciation, and book value at the end of the fifth year, under activity based method are $17,021, $80,000 and $16,000 respectively.

Record the adjusting entry for depreciation expense at the end of the third year under activity based method.

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation expense – Equipment (Refer table (16))		18,723
	Accumulated depreciation -Equipment			18,723
	(To record the depreciation expense)

Table (17)

To record the adjusting entry for depreciation expense at the end of the third year:

• Depreciation expense is an expense (decreases the stockholders’ equity) and it is increased by $18,723. Therefore, debit depreciation account with $18,723.
• Accumulated depreciation is a contra-asset. Increase in the accumulated depreciation account decreases the related asset account. Therefore, credit accumulated depreciation account with $18,723.

Working Note:

The above calculation is computed using spreadsheet as follows:

Table (18)