New lithographic equipment, acquired at a cost of $718,750 at the beginning of a

Question

New lithographic equipment, acquired at a cost of $718,750 at the beginning of a fiscal year, has an estimated useful life of five years and an estimated residual value of $61,800. 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 $105,300. 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 the following methods: a. Straight-line method Year Depreciation Expense Accumulated Depreciation, End of Year Book Value, End of Year 1 $ $ $ 2 $ $ $ 3 $ $ $ 4 $ $ $ 5 $ $ $ b. Double-declining-balance method Year Depreciation Expense Accumulated Depreciation, End of Year Book Value, End of Year 1 $ $ $ 2 $ $ $ 3 $ $ $ 4 $ $ $ 5 $ $ $ 2. Journalize the entry to record the sale, assuming double-declining balance method is used. Debit Credit Cash Accumulated Depreciation Equipment Gain on Sale of Equipment 3. Journalize the entry to record the sale, assuming that the equipment was sold for $90,400 instead of $105,300. Debit Credit Cash Accumulated Depreciation Loss on Sale of Equipment Equipment

Explanation / Answer

Prepare the following for Machine A.
The journal entry to record its purchase on January 1, 2008.
Dr Machine A 40,000
Cr Cash 40,000
The journal entry to record annual depreciation at December 31, 2008.
Dr Depreciation Expense, Machine A 7,000
Cr Accumulated Depreciation, Machine A 7,000

calculate the amount of depreciation expense that should record for machine B each year of its useful life under the following assumptions.
Pele uses the straight-line method of depreciation.
(160,000 - 10,000) / 4 = 37,500

Pele uses the declining-balance method. The rate used is twice the straight-line rate.
Year 1: 160,000 x 50% = 80,000 Depreciation expense. New book value, 80,000
Year 2: 80,000 x 50% = 40,000 Depreciation expense. New book value, 40,000
Year 3: 40,000 x 50% = 20,000 Depreciation expense. New book value, 20,000
Year 4 20,000 x 50% = 10,000 Depreciation expense.

Pele uses the units-of-activity method and estimates that the useful life of the machine is 125,000 units. Actual usage is as follows: 2008, 45,000 units; 2009, 35,000 units; 2010, 25,000 units; 2011, 20,000 units.
(160,000 - 10,000) / 125,000 = 1.20 per unit
Year 1: 45,000 x 1.20 = 54,000 Depreciation Expense
Year 2: 35,000 x 1.20 = 42,000 Depreciation Expense
Year 3: 25,000 x 1.20 = 30.000 Depreciation Expense
Year 4: 20,000 x 1.20 = 24,000 Depreciation Expense

Which method used to calculate depreciation on machine B reports the highest amount of depreciation expense in year 1 (2008)? The highest amount in year 4 (2011)? The highest total amount over the 4-year period?
Year 1: Declining balance
Year 4: Straight-line

They each record the same amount of depreciation over the 4-year period (150,000).

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