Depreciation by Two Methods; Sale of Fixed Asset New tire retreading equipment,

Question

Depreciation by Two Methods; Sale of Fixed Asset 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 $18,000.1. 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.

Explanation / Answer

Solution:

Since the straight-line depreciation would have been (100% / 4) = 25%, the double declining percentage will be twice that (2 * 25%) = 50%

Determination of Depreciation expense using straight line method:

Depreciation = (Cost - Residual value)/ Useful life

= (110,000 - 7,500)/ 4

= 25,625

Determination of Depreciation expense using double declining balance method:

Depreciation = 110,000 * 50% = 55,000

**The asset is not depreciated below the estimated residual value of (102,500 - 96,250) 7,500.

The entry to record the sale, assuming double declining balance method is used:

In the first week of the fourth year, the equipment was sold for $18,000:

Gain on Sale of Fixed Asset = 18,000 - 13,750 = 4,250

In the first week of the fourth year, the equipment was sold for $10,500 instead of $18,000:

Loss on Sale of Fixed Asset = 10,500 - 13,750 = -3,250

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

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