On March 31, 2011, the Herzog Company purchased a factory complete with machiner

Question

On March 31, 2011, the Herzog Company purchased a factory complete with machinery and equipment. The allocation of the total purchase price of $1,000,000 to the various types of assets along with estimated useful lives and residual values are as follows
Assets Costs Estimated Residual Value Estimated Useful Life in Years
land 100000 n/a n/a
building 500000 none 25
machinery 240000 10% of cost 8
equiptment 160000 13000 6
Total 1,000,000

On June 29, 2012, machinery included in the March 31, 2011, purchase that cost $100,000 was sold for $80,000. Herzog uses the straight-line depreciation method for buildings and machinery and the sum-of-the-years'-digits method for equipment. Partial-year depreciation is calculated based on the number of months an asset is in service

1. Compute depreciation expense on the building, machinery, and equipment for 2011.
2. Prepare the journal entries to record (1) depreciation on the machinery sold on
June 29, 2012 and (2) the sale of machinery.
3. Compute depreciation expense on the building, remaining machinery, and equipment for
2012.

Explanation / Answer

1. Depreciation for 2011:

Straight-line for building and machinery:

Buidling: 500,000/25 = $20,000 per year

For 2011: (bought 3/31/11 = 9 months in 2011)

20,000*9/12 = $15,000

Machinery: residual value = 10% of cost = 0.10*240,000 = 24,000

(240,000 - 24,000)/8 = $27,000 per year

for 2011, 9 month = 27,000*9/12 = $20,250

sum of years digits for equipment:

6-year life: 6 + 5 + 4 + 3 + 2 + 1 = 21

first year: (6/21)*(160,000 - 13,000) = $42,000

for 2011, 9 months: 42000*9/12 = $31,500

2. Machinery that cost 100,000. Straight-line would be (100,000-10,000)/8 = 11,250 per year

Depreciation for 2012 - 6 months: 11,250*6/12 = $5625

Jounral entry for depreciation:

Debit depreciation expense 5625

credit accumulatd depreciation 5625

book value of machiney: cost - depreciaiton for 2011 - depreciation for 2012 = 100,000 - 11,250*9/12 - 11250*6/12 = 100,000 - 8437.50- 5625 = 85,937.50

total accumulatd depreciation = 8437.50+ 5625 = 14,062.50

loss on sale = 80,000 - 85,937.50 = 5,937.50

Journal entry to record sale:

Debit cash 80,000

Debit accumulated depreciation 14,062.50

Debit loss of sale 5,937.50

Credit machinery 100,000

3. 2012 depreciation:

Building: $20,000 (one full year straight line)

Remaining machinery: (140,000-14,000)/8 = 15750 per year

one full year = $15,750

equipment:

remaining first year (3 months): $42,000 - 31,500 = $10,500

second year: (160,000 = 13,000)*5/21 = 35,000

9 months of second year = 35,000*9/12 = 26250

depreciation for 2012 = 3 months first year and 9 months second year = 10500 + 26250 = $36,750

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