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

Required
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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