On January 1, 20ff, Bourgeois Company purchased the following two machines for u
ID: 2475211 • Letter: O
Question
On January 1, 20ff, Bourgeois Company purchased the following two machines for use in its production process. Machine A: The cash price of this machine was $58,000. Related expenditures included: sales tax $2,750, shipping costs $100, insurance during shipping $75, installation and testing costs $75, and $90 of oil and lubricants to be used with the machinery during its first year of operation. Dill estimates that the useful life of the machine is 4 years with a $5,000 salvage value remaining at the end of that time period. Machine B: The recorded cost of this machine was $120,000.Dill estimates that the useful life of the machine is 4 years with a $10,000 salvage value remaining at the end of that time period. Instructions Prepare the following for machine A. The journal entry to record its purchase on January 1, 2017. The journal entry to record annual depreciation at December 31, 2017, assuming the straight-line method of depreciation is used. Calculate the amount of depreciation expense that Bourgeois should record for Machine B each year of its useful life under the following assumption. Bourgeois uses the straight-line method of depreciation. Bourgeois uses the declining-balance method. The rate used is twice the straight-line rate. Bourgeois uses the units-of-activity method and estimates the useful life of the machine is 25,000 units. Actual usage is as follows: 2017, 5,500 units; 2018, 7,000 units; 2019, 8,000 units; 2020, 4,500 units. Which method used to calculate depreciation on Machine B reports the lowest amount of depreciation expense in year 1 (2017)? The lowest amount in year 4 (2020)7 The lowest total amount over the 4-year period?Explanation / Answer
Answer :
a).
1. For Machine A : Journal entry to record its purchase on January 1, 2017:
Total cost of machinery = $61,000 which is computed as under
Purchases $58,000
Sales tax $2,750
Shipping costs $100
Insurance during shipping $75
Installation and testing $75
Total cost of machinery $61,000
Thus, Journal Entry for purchase =
Machinery $61,000
Cash $61,000
2. Journal entry to record annual depreciation on December 31, 2017 under straight line method :
Amount Of Annual Depreciation =
Recorded cost $61,000
Less: Salvage value $5,000
Depreciable cost $56,000
Years of useful life ÷ 4
Annual depreciation $14,000
Thus, Journal Entry to record depreciation under on December 31, 2017 is :
Depreciation Expense $14,000
Accumulated Depreciation $14,000
b).
1. Amount of depreciation for Machine B under straight line depreciation method is :
Recorded cost $120,000
Less: Salvage value $10,000
Depreciable cost $110,000
Years of useful life ÷ 4
Annual depreciation $27,500
2.
Straight-Line Depreciation Rate = 100/4 = 0.25
Double-Declining Balance Rate = 0.25 * 2 = 0.5 = 50%
3. Depreciation under units - of - activity method :
Depreciation Cost per Unit of Activity = $110,000 / 25,000 = $4.4
Year
Usage
Rate
Annual Depreciation Expense
2017
5500
$4.4
$24,200
2018
7000
$4.4
$30,800
2019 8
000
$4.4
$35,200
2020
4500
$4.4
$19,800
c. The Straight-Line method reports the lowest depreciation expense for 2017, while the Double Declining Balance provides the lowest amount for 2020. No matter which of the three methods is used, the same total amount of depreciation expense will be recognized over the four-year period
YearBook Value
Year Start Depreciation
Percent Depreciation
Expense Accumulated
Depreciation Book Value
Year End 2017 $120,000 50.00% $60,000 $60,000 $60,000 2018 $60,000 50.00% $30,000 $90,000 $30,000 2019 $30,000 50.00% $15,000 $105,000 $15,000 2020 $15,000 33.33% $5,000 $110,000 $10,000
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