1 . New tire retreading equipment, acquired at a cost of $140,000 at the beginni
ID: 2377476 • Letter: 1
Question
1. New tire retreading equipment, acquired at a cost of $140,000 at the beginning
of a fiscal year, has an estimated useful life of four years and an estimated residual value of $10,000. 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 fourth year, the equipment was sold for $23,300.
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. Illustrate the effects on the accounts and financial statements of the sale.
3. Illustrate the effects on the accounts and financial statements of the sale,
assuming a sale price of $15,250 instead of $23,300.
2. Data related to the acquisition of timber rights and intangible assets of Gemini
Company during the current year ended December 31 are as follows:
a. On December 31, Gemini Company determined that $3,000,000 of goodwill
was impaired.
b. Governmental and legal costs of $920,000 were incurred by Gemini Company
on June 30 in obtaining a patent with an estimated economic life of 8 years.
Amortization is to be for one-half year.
c. Timber rights on a tract of land were purchased for $1,350,000 on March 6.
The stand of timber is estimated at 15,000,000 board feet. During the current
year, 3,300,000 board feet of timber were cut and sold.
Instructions
1. Determine the amount of the amortization, depletion, or impairment for the
current year for each of the foregoing items.
2. Illustrate the effects on the accounts and financial statements of the adjustments for each item.
Explanation / Answer
Since the straight-line depreciation would have been 25% (100% / 4), the double-declining percentage will be twice that (50%). The double-declining method is calculated by using the current book value of the asset, ignoring residual value. However, the book value is not allowed to drop below the book value. Depreciation for the first three years would be:
Year 1: 144,000 x 50% = 72,000 Depreciation Expense. Accum Depr. 72,000, New book value 72,000.
Year 2: 72,000 x 50% = 36,000 Depreciation Expense. Accum Depr. 108,000. New book value 36,000.
Year 3: 36,000 x 50% = 18,000 Depreciation Expense. Accum Depr. 126,000. New book value 18,000.
In the first week of the fourth year, the equipment was sold for $19,750.
1. Journalize the entry to record the sale. If an amount box does not require an entry, leave it blank.
Dr Cash 19,750
Dr Accumulated Depreciation, Equipment 126,000
Cr Gain on Sale of Equipment 1,750
Cr Equipment 144,000
2. Journalize the entry to record the sale, assuming that the equipment sold for $14,900 instead of $19,750. If an amount box does not require an entry, leave it blank.
Dr Cash 14,900
Dr Accumulated Depreciation, Equipment 126,000
Dr Loss on Sale of Equipment 3,100
Cr Equipment 144,000
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