New lithographic equipment, acquired at a cost of $800,000 at the beginning of a fiscal year, has an estimated useful life of five years and an estimated residual value

New lithographic equipment, acquired at a cost of $800,000 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. On the basis of the data presented to the manager, the double-declining-balance method was selected.

In the first week of the fifth year, the equipment was sold for $135,000.

Instructions
1. 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. The following columnar headings are suggested for each schedule:





Year
Depreciation
Expense
Accumulated
Depreciation,
End of Year
Book Value,
End of Year


2. Journalize the entry to record the sale.

3. Journalize the entry to record the sale, assuming that the equipment was sold for $88,750 instead of $135,000.


Answer:



























1.
Depreciation
Accumulated
Depreciation, Book Value,
Year Expense End of Year End of Year
a. 1………………………………………………… $142,000 * $142,000 $658,000
2……………………………………………… 142,000 284,000 516,000
3………………………………………………… 142,000 426,000 374,000
4……………………………………………… 142,000 568,000 232,000
5………………………………………………… 142,000 710,000 90,000
* [($800,000 – $90,000) ÷ 5]
b. 1 [$800,000 × (1/5) × 2]………………… $320,000 $320,000 $480,000
2 [$480,000 × (1/5) × 2]………………… 192,000 512,000 288,000
3 [$288,000 × (1/5) × 2]………………… 115,200 627,200 172,800
4 [$172,800 × (1/5) × 2]………………… 69,120 696,320 103,680
5 ($800,000 – $696,320 – $90,000)…… 13,680 * 710,000 90,000
* Book value should not be reduced below $90,000, the residual value.
2.
 Cash 135,000
Accumulated Depreciation—Equipment 696,320
Equipment 800,000
Gain on Sale of Equipment* 31,320
* $135,000 – $103,680
3. Cash 88,750
Accumulated Depreciation—Equipment 696,320
Loss on Sale of Equipment* 14,930
Equipment 800,000

* $103,680 – $88,750

PR 10-3A Depreciation by three methods; partial years :

Perdue Company purchased equipment on April 1, 2012, for $270,000. The equipment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $9,000. The equipment was used for 7,500 hours during 2012, 5,500 hours in 2013, 4,000 hours in 2014, and 1,000 hours in 2015.


Instructions

Determine the amount of depreciation expense for the years ended December 31, 2012, 2013, 2014, and 2015, by (a) the straight-line method, (b) the units-of-output method, and (c) the double-declining-balance method.


Answer:




















a. Straight-line method:
2012: [($270,000 – $9,000) ÷ 3] × 9/12…………………………………………… $65,250
2013: ($270,000 – $9,000) ÷ 3…………………………………………………… 87,000
2014: ($270,000 – $9,000) ÷ 3…………………………………………………… 87,000
2015: [($270,000 – $9,000) ÷ 3] × 3/12………………………………………… 21,750
b. Units-of-output method:
2012: 7,500 hours × $14.50*……………………………………………………… $108,750
2013: 5,500 hours × $14.50……………………………………………………… 79,750
2014: 4,000 hours × $14.50……………………………………………………… 58,000
2015: 1,000 hours × $14.50……………………………………………………… 14,500
* ($270,000 – $9,000) ÷ 18,000 hours = $14.50 per hour
c. Double-declining-balance method:
2012: $270,000 × 2/3 × 9/12…………...………………………………………… $135,000
2013: ($270,000 – $135,000) × 2/3……………………………………………… 90,000
2014: ($270,000 – $135,000 – $90,000) × 2/3…………………………………… 30,000
2015: ($270,000 – $135,000 – $90,000 – $30,000 – $9,000*)……………… 6,000
* Book value should not be reduced below $9,000, the residual value.

PR 10-6A Amortization and depletion entries:

Data related to the acquisition of timber rights and intangible assets during the current year ended December 31 are as follows:

a. Timber rights on a tract of land were purchased for $1,600,000 on February 22. The stand of timber is estimated at 5,000,000 board feet. During the current year, 1,100,000 board feet of timber were cut and sold.

b. On December 31, the company determined that $3,750,000 of goodwill was impaired.

c. Governmental and legal costs of $6,600,000 were incurred on April 3 in obtaining a patent with an estimated economic life of 12 years. Amortization is to be for threefourths of a year.



Instructions
1. Determine the amount of the amortization, depletion, or impairment for the current year for each of the foregoing items.

2. Journalize the adjusting entries required to record the amortization, depletion, or impairment for each item.


Answer:



















1. a. $1,600,000 ÷ 5,000,000 board feet = $0.32 per board foot;
1,100,000 board feet × $0.32 per board foot = $352,000
b. Loss from impaired goodwill, $3,750,000
c. $6,600,000 ÷ 12 years = $550,000;
3/4 of $550,000 = $412,500
2. a. Depletion Expense 352,000
Accumulated Depletion 352,000
Depletion of timber rights.
b.
 Loss from Impaired Goodwill 3,750,000
Goodwill 3,750,000
Impaired goodwill.
c.
 Amortization Expense—Patents 412,500
Patents 412,500
Patent amortization