New lithographic equipment, acquired at a cost of $800,000 on March 1 of Year 1 (beginning of the fiscal year)

New lithographic equipment, acquired at a cost of $800,000 on March 1 of Year 1 (beginning of the fiscal year), has an estimated useful life of five years and an estimated residual value of $90,000. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year.

On March 4 of Year 5, the equipment was sold for $135,000.

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  

2. Journalize the entry to record the sale assuming that the manager chose the double-declining-balance method.

3. Journalize the entry to record the sale in (2) assuming that the equipment was sold for $88,750 instead of $135,000.

Answer:

1.

Depreciation Book Value,

Expense End of Year

a. 1......................................................$142,000 $658,000

2...................................................... 142,000 516,000

3...................................................... 142,000 374,000

4...................................................... 142,000 232,000

5...................................................... 142,000 90,000

Yearly depreciation = [($800,000 – $90,000) ÷ 5] = $142,000

b. [$800,000 × (100% ÷ 5) × 2]......... $320,000 $480,000

[$480,000 × (100% ÷ 5) × 2]......... 192,000 288,000

[$288,000 × (100% ÷ 5) × 2]......... 115,200 172,800

[$172,800 × (100% ÷ 5) × 2]......... 69,120 103,680

($800,000 – $696,320 – $90,000)... 13,680 90,000

Note:  Book value should not be reduced below $90,000, the residual value.

2.  Mar. 4 Cash

Accumulated Depreciation—Equipment

Equipment

Gain on Sale of Equipment

Gain on sale of equipment = $135,000 – ($800,000 – $696,320) = $31,320

3.  Mar. 4 Cash

Accumulated Depreciation—Equipment

Loss on Sale of Equipment

Equipment

Loss on sale of equipment = $88,750 – ($800,000 – $696,320) = –$14,930