On July 1, 2014 Linked Up Inc. acquired a new machine at a cost of $15,000 with
ID: 2473875 • Letter: O
Question
On July 1, 2014 Linked Up Inc. acquired a new machine at a cost of $15,000 with a residual value of $3,000. The estimated useful life is 5 years and 100,000 units. For the year ending June 30, 2015 the machine produced 15,000 units. For the year ending June 30, 2016, the machine produced 10,000 units. 1. Using the three depreciation methods (straight line, units of production, and double decline balancing) calculate the depreciation for the year ending 6/30/15 and present each of the three journal entries in proper form. 2. On July 1, 2016 the machine is sold for $10,000. Complete the journal entry in proper form based on your calculations under each of the three depreciation methods (see item 1 in this problem). You will present three separate, independent journal entries.Explanation / Answer
The calculation of depreciation on new machine costing $15,000 having residual value of $3,000 and estimated useful life of 5 years is as under: Under Straight line method of depreciation the depreciation for the year ended 30th June 2015 is as under: Machine purchased on 1st July 2014 at a cost of $15,000. Depreciation=(Cost-Salvage value)/Estimated useful life Depreciation=($15,000-$3,000)/5 '=$2,400 Under straight line balance method the depreciation amount remain constant therefore for the year ended 30th June 2015 the depreciation on machine would be $2,400. The journal entry for recording depreciation expense for the year ended 30th June 2015 is as under: 30th June 2015 Depreciation Expense $ 2,400 Accumulated Depreciation $ 2,400 (Being depreciation expenses recorded) Under Units of production method of depreciation, the depreciation for the year ended 30th June 2015 is as under: Estimated number of units produced in 5 years=100,000 units No. of units produced at the year ended 30th June 2015=15,000 units Depreicaiton=[(Cost-Salvage value)/Estimated units produced]×No. of units produced during the year ended 30th June 2015 '=[($15,000-$3,000)/100,000]×15,000 =$1,800 The journal entry for recording depreciation expense for the year ended 30th June 2015 is as under: 30th June 2015 Depreciation Expense $ 1,800 Accumulated Depreciation $ 1,800 (Being depreciation expenses recorded) Depreciation for the year ended 30th June 2015 under units of production method of depreciaiton is $1,800. Under double declining balance method, the depreciation for the year ended 30th June 2015 is as under: Double declining depreicaiton rate=2×Straight line depreciation rate Straight line depreciation rate=Depreciation amount/(Cost-Salvage value)*100 '=$2,400/($15,000-$3,000)*100 '=20% Double declining depreciation rate=2×20% '=40% Cost of machine=$15,000 Depreciation rate=40% Depreciation for the year ended 30th June 2015=$15,000×40% '=$6,000 Under double declining balance method, the depreciation for the year ended 30th June 2015 is $6,000. The journal entry for recording depreciation expense for the year ended 30th June 2015 is as under: 30th June 2015 Depreciation Expense $ 6,000 Accumulated Depreciation $ 6,000 (Being depreciation expenses recorded) 2 If the machine sold for $10,000 on 1st July, 2016 then the gain/loss on sale of machine under SLM, units of production method, double declining method is calculated as under: Under straight line method: Book value of machine as on 1st July 2016 = Cost-deprecaition for two years Depreciation for two years: 30th June 2015= $2,400 30th June 2016=$2,400 Cost Depreciation Book value 30th June 2015 $15,000 $2,400 $ 12,600 30th June 2016 $ 12,600 $2,400 $ 10,200 Book value of machine as on 30th June 2016 is $10,200. Sale price of machine is $10,000. Loss on sale of machine=Sale price-Book value '=$10,000-$10,200 '=($200) The journal entry for sale of machine under Straight line depreciation method is as under: 1st July, 2016 Cash $ 10,000 Loss on sale of machine $ 200 Machine $ 10,200 (Being machine sold and loss on sale recorded) Under units of production method: Book value of machine as on 1st July 2016 = Cost-deprecaition for two years Depreciation for two years: 30th June 2015= $1,800 30th June 2016=[($15,000-$3,000)/100,000]×10,000 =$1,200 Cost Depreciation Book value 30th June 2015 $15,000 $1,800 $ 13,200 30th June 2016 $ 13,200 $1,200 $ 12,000 Book value of machine as on 30th June 2016 is $12,000. Sale price of machine is $10,000. Loss on sale of machine=Sale price-Book value '=$10,000-$12,000 '=($2,000) The journal entry for sale of machine under units of production depreciation method is as under: 1st July, 2016 Cash $ 10,000 Loss on sale of machine $ 2,000 Machine $ 12,000 (Being machine sold and loss on sale recorded) Under double declining balance method: Book value of machine as on 1st July 2016 = Cost-deprecaition for two years Depreciation for two years: 30th June 2015= $6,000 30th June 2016=($15,000-$6,000)×40%=$3,600 Cost Depreciation Book value 30th June 2015 $15,000 $6,000 $ 9,000 30th June 2016 $ 9,000 $3,600 $ 5,400 Book value of machine as on 30th June 2016 is $5,400. Sale price of machine is $10,000. Gain on sale of machine=Sale price-Book value '=$10,000-$5,400 '=$4,600 The journal entry for sale of machine under double declining balance method of depreciation is as under: 1st July, 2016 Cash $ 10,000 Machine $ 5,400 Gain on sale of machine $ 4,600 (Being machine sold and gain on sale recorded)
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