Vaughn Company purchases equipment on January 1, Year 1, at a cost of $500,000.

Question

Vaughn Company purchases equipment on January 1, Year 1, at a cost of $500,000. The asset is expected to have a service life of 10 years and a salvage value of $50,000. Consider the following independent situations:

(a) Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years’- digits method.

(b) Compute the amount of depreciation for each of Years 1 through 3 using the double-declining balance method. (In performing your calculations, round constant percentage to the nearest one-hundredth of a point and round answers to the nearest dollar.)

(c) Assume Vaughn uses the straight-line method and sells the equipment on July 1, Year 2. Provide the related journal entry.

(d) Assume Vaughn uses the straight-line method and determines the need to test for impairment on January 1, Year 2. Future cash flows associated with the equipment are estimated to be $400,000 and the equipment’s estimated fair value is $350,000. Record any related entry on January 1, Year 2 and record Year 2 depreciation for the equipment.

Explanation / Answer

Vaughn Company purchases equipment on January 1, Year 1, at a cost of $500,000.

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