New lithographic equipment, acquired at a cost of $905,600 at the beginning of a

Question

New lithographic equipment, acquired at a cost of $905,600 at the beginning of a fiscal year, has an estimated useful life of five years and an estimated residual value of $101,880. 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 $149,286.

Required: 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. Round your answers to the nearest whole dollar. 2. On January 1, journalize the entry to record the sale. Refer to the Chart of Accounts for exact wording of account titles. 3. On January 1, journalize the entry to record the sale, assuming that the equipment was sold for $103,386 instead of $149,286. Refer to the Chart of Accounts for exact wording of account titles.

Explanation / Answer

1.

a. Straight-line method

Annual Depreciation expense = (Original cost - Salvage value)/ Useful life

= ($905600 - $101880) / 5

= $160744

b. Double-declining-balance method:

Straight-line depreciation rate = ($905600/5) / $905600 = 20%

*Reduced to a level so as to get salvage value of $101880

2. Journal

3. Journal

Year Depreciation
= Book value x 2 x
SLM rate Accumulated
depreciation Book
Value 1 $362240 $362240 $543360 2 217344 579584 326016 3 130406 709990 195610 4 78244 788234 117366 5 15485* 803720 101880

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