New tire retreading equipment, acquired at a cost of $110,000 on September 1 of Year 1 (beginning of the fiscal year)

New tire retreading equipment, acquired at a cost of $110,000 on September 1 of Year 1 (beginning of the fiscal year), has an estimated useful life of four years and an estimated residual value of $7,500. 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. On September 6 of Year 4, the equipment was sold for $18,000.

Instructions

1. Determine the annual depreciation expense for each of the estimated four 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 sold for $10,500 instead of $18,000.

Answer:

1.

Depreciation Book Value,

Expense End of Year

a. 1......................................................... $25,625 $84,375

2......................................................... 25,625 58,750

3......................................................... 25,625 33,125

4......................................................... 25,625 7,500

Yearly depreciation = [($110,000 – $7,500) ÷ 4] = $25,625

b. 1 [$110,000 × (100% ÷ 4) × 2]............ $55,000 $55,000

2 [$55,000 × (100% ÷ 4) × 2]............... 27,500 27,500

3 [$27,500 × (100% ÷ 4) × 2]............... 13,750 13,750

4 ($110,000 – $96,250 – $7,500)......... 6,250 7,500

Note: Book value should not be reduced below $7,500, the residual value.

2.  Sept. 6 Cash

Accumulated Depreciation—Equipment

Equipment

Gain on Sale of Equipment

Gain on sale of equipment = $18,000 – ($110,000 – $96,250) = $4,250

3.  Sept. 6 Cash

Accumulated Depreciation—Equipment

Loss on Sale of Equipment

Equipment

Loss on sale of equipment = $10,500 – ($110,000 – $96,250) = –$3,250