PR 10-4A Depreciation by two methods; sale of fixed asset

New lithographic equipment, acquired at a cost of $787,500 at the beginning of a fiscal year, has an estimated useful life of five years and an estimated residual value of $67,500. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year. On the basis of the data presented to the manager, the double-declining-balance method was selected. In the first week of the fifth year, the equipment was sold for $115,000. Instructions 1. Determine the annual depreciation expense for each of the estimated five years of use, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by (a) the straight-line method and (b) the double-declining-balance method. The following columnar headings are suggested for each schedule:


Year
Depreciation Expense
Accumulated Depreciation, End of Year
Book Value, End of Year

2. Journalize the entry to record the sale. 3. Journalize the entry to record the sale, assuming that the equipment was sold for $98,900 instead of $115,000.

Answer:


1.    Accumulated   Depreciation Depreciation, Book Value,  Year Expense End of Year End of Year  a. 1 $144,000* $144,000 $643,500  2 144,000 288,000 499,500  3 144,000 432,000 355,500  4 144,000 576,000 211,500  5 144,000 720,000 67,500 *[($787,500 – $67,500)/5]   
b. 1 $315,000 [$787,500 × (1/5) × 2] $315,000 $472,500  2 189,000 [$472,500 × (1/5) × 2] 504,000 283,500  3 113,400 [$283,500 × (1/5) × 2] 617,400 170,100  4 68,040 [$170,100 × (1/5) × 2] 685,440 102,060  5 34,560* [$787,500 – $685,440 – $67,500] 720,000 67,500   *Book value should not be reduced below $67,500, the residual value.  

2.
Cash................................................................................ 115,000
Accumulated Depreciation—Equipment ................................................... 685,440  
Equipment......................................................  787,500  
Gain on Sale of Equipment......................................  12,940*  
*($115,000 – $102,060)

3.
Cash................................................................................ 98,900
Accumulated Depreciation—Equipment ................................................ 685,440
Loss on Sale of Equipment.......................................................... 3,160*  
Equipment.................................................................  787,500
*($102,060 – $98,900)

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