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28 January, 11:13

New lithographic equipment, acquired at a cost of $800,000 on March 1 at the beginning of a fiscal year, has an estimated useful life of five years and an estimated residual value of $90,000. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year. In the first week of the fifth year, on March 4, the equipment was sold for $135,000.

Required:

a. Determine the annual depreciation expense for each of the estimated five 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.

b. Journalize the entry to record the sale assuming the manager chose the double-declining-balance method.

c. On January 1, journalize the entry to record the sale in (b), assuming that the equipment was sold for $88,750 instead of $135,000.

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Answers (1)
  1. 28 January, 13:38
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    a. Determine the annual depreciation expense for each of the estimated five 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

    depreciation expense per year = ($800,000 - $90,000) / 5 years = $142,000

    End of year depreciation expense book value

    1 $142,000 $658,000

    2 $142,000 $516,000

    3 $142,000 $374,000

    4 $142,000 $232,000

    and (b) the double-declining-balance method.

    depreciation expense year 1 = 2 x 1/5 x $800,000 = $320,000

    depreciation expense year 1 = 2 x 1/5 x $480,000 = $192,000

    depreciation expense year 1 = 2 x 1/5 x $288,000 = $115,200

    depreciation expense year 1 = 2 x 1/5 x $172,800 = $69,120

    End of year depreciation expense book value

    1 $320,000 $480,000

    2 $192,000 $288,000

    3 $115,200 $172,800

    4 $69,120 $103,680

    b. Journalize the entry to record the sale assuming the manager chose the double-declining-balance method.

    Dr Cash 135,000

    Dr Accumulated depreciation - lithographic equipment 696,320

    Cr Lithographic equipment 800,000

    Cr Gain on sale 31,320

    c. Journalize the entry to record the sale in (b), assuming that the equipment was sold for $88,750 instead of $135,000.

    Dr Cash 88,750

    Dr Accumulated depreciation - lithographic equipment 696,320

    Dr Loss on sale 14,930

    Cr Lithographic equipment 800,000
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