During the current year, Rothchild, Inc., purchased two assets that are describe

Question

During the current year, Rothchild, Inc., purchased two assets that are described as follows:

Heavy Equipment

Purchase price, $275,000.

Expected to be used for 10 years, with a residual value at the end of that time of $50,000.

Expenditures required to recondition the equipment and prepare it for use, $75,000.

Patent

Purchase price, $75,000.

Expected to be used for five years, with no value at the end of that time.

Page 423

Rothchild depreciates heavy equipment by the declining-balance method at 150 percent of the straight-line rate. It amortizes intangible assets by the straight-line method. At the end of two years, because of changes in Rothchild's core business, it sold the patent to a competitor for $30,000.

Instructions

Compute the amount of depreciation expense on the heavy equipment for each of the first three years of the asset's life.

Compute the amount of amortization on the patent for each of the two years it was owned by Rothchild.

Prepare the plant and intangible assets section of Rothchild's balance sheet at the end of the first and second years. Also, calculate the amount of the gain or loss on the patent that would be included in the second year's income statement.

Heavy Equipment

Purchase price, $275,000.

Expected to be used for 10 years, with a residual value at the end of that time of $50,000.

Expenditures required to recondition the equipment and prepare it for use, $75,000.

Patent

Purchase price, $75,000.

Expected to be used for five years, with no value at the end of that time.

Explanation / Answer

Answer: Calculation of the amount of depreciation expense on the heavy equipment for each of the first three years of the asset's life.

HEAVY EQUIPMENT
straight-line rate = 100/10 = 10%
Declining-balance rate = 150% x 10% = 15%
Dep. Exp. Year 1 = 15% x $350,000 = $52,500
Dep. Exp. Year 2 = 15% x (350,000 - 52,500) = $44,625
Dep. Exp. Year 3 = 15% x (350,000 - 52,500 - 44,625) = $37,931
Total Depreciation Expense = $135,056

To record Dep exp for first 3 years:
Depreciation Expense A/c DR. $135,056
         Accumulated Depreciation A/c    $135,056

PATENT: Calculation of the amount of amortization on the patent for each of the two years:

Amortization Expense A/C Dr. $30,000 ($75,000/5yrs x 2yrs)
   Accumulated AmortizationA/C $30,000

Calculation of the amount of the gain or loss on the patent that would be included in the second year's income statement:

Patent cost = $ 75000

Less: amortization =$30000

Remaining value = $ 45000

Less: sale value = $ 30000

loss on sale of patent = $15000

To record the sale of Patent:
Cash A/C Dr. $30,000
Accumulated AmortizationA/C Dr. $30,000
Loss on Sale A/C Dr.                     $15,000
Patent                             $75,000

Balance sheet Assest side Year 1 Year 2 Non current assest Plant $350000 $297500 Less: Dep $52500 $44625 WDV $297500 $252875 Intangible assest Patent $75000 $60000 Less: amortization $15000 $15000 $60000 $45000

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