New tire retreading equipment, acquired at a cost of $110,000 at the beginning of a fiscal year, has an estimated useful life of four years

New tire retreading equipment, acquired at a cost of $110,000 at the beginning of a fiscal year, has an estimated useful life of four years and an estimated residual value of $7,500. 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 fourth year, the equipment was sold for $18,000.


Instructions
1. Determine the annual depreciation expense for each of the estimated four 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 sold for $10,500 instead of $18,000.


Answer:

























1.
Depreciation
Accumulated
Depreciation, Book Value,
Year Expense End of Year End of Year
a. 1………………………………………………… $25,625* $ 25,625 $84,375
2………………………………………………… 25,625 51,250 58,750
3………………………………………………… 25,625 76,875 33,125
4………………………………………………… 25,625 102,500 7,500
* [($110,000 – $7,500) ÷ 4]
b. 1 [$110,000 × (1/4) × 2]……………………… $55,000 $ 55,000 $55,000
2 [$55,000 × (1/4) × 2]……………………… 27,500 82,500 27,500
3 [$27,500 × (1/4) × 2]……………………… 13,750 96,250 13,750
4 ($110,000 – $96,250 – $7,500)………… 6,250* 102,500 7,500
* Book value should not be reduced below $7,500, the residual value.
2.
 Cash 18,000
Accumulated Depreciation—Equipment 96,250
Equipment 110,000
Gain on Sale of Equipment* 4,250
* $18,000 – $13,750
3. Cash 10,500
Accumulated Depreciation—Equipment 96,250
Loss on Sale of Equipment* 3,250
Equipment 110,000

* $13,750 – $10,500