On March 31, 2016, the Herzog Company purchased a factory complete with machiner
ID: 2599122 • Letter: O
Question
On March 31, 2016, the Herzog Company purchased a factory complete with machinery and equipment. The allocation of the total purchase price of $900,000 to the various types of assets along with estimated useful lives and residual values are as follows:
On June 29, 2017, machinery included in the March 31, 2016, purchase that cost $90,000 was sold for $70,000. 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.
Compute depreciation expense on the building, machinery, and equipment for 2016. (Do not round intermediate calculations.)
Prepare the journal entries to record the depreciation on the machinery sold on June 29, 2017, and the sale of machinery. (Do not round intermediate calculations. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
On March 31, 2016, the Herzog Company purchased a factory complete with machinery and equipment. The allocation of the total purchase price of $900,000 to the various types of assets along with estimated useful lives and residual values are as follows:
Explanation / Answer
Part 1 - Depreciation expense for 2016:
Buildings & Machinery - Straight line Annual Depreciation = (Cost – Salvage value) / Estimated useful life
Equipment - sum-of-the years’-digits method = (Cost – Salvage value) * Number of years of estimated life remaining at the beginning of the year / SYD
SYD = n*(n+1)/2
n = Estimated useful life
Annual Depreciation:
Buildings = ($400,000 - $0) / 25 = $16,000
Machinery = ($200,000 - $240,000*12%) / 8 = $26,400
EQUIPMENT -
Depreciation for year 1 (Number of years of estimated life remaining at the beginning of the year – 5)
Equipment = ($150,000 – $15,000)*5/ 15**= $45,000
**n = 5*(5+1)/2 = 15
Depreciation for year 2 (Number of years of estimated life remaining at the beginning of the year – 4)
Equipment = ($160,000 – $13,000)*4/ 15**= $36,000
Depreciation for year 3 (Number of years of estimated life remaining at the beginning of the year – 3)
Equipment = ($160,000 – $13,000)*3/ 15**= $27,000
Depreciation for year 4 (Number of years of estimated life remaining at the beginning of the year – 2)
Equipment = ($160,000 – $13,000)*2/ 15**= $18,000
Depreciation for year 5 (Number of years of estimated life remaining at the beginning of the year – 1)
Equipment = ($160,000 – $13,000)*1/ 15**= $9,00
2016 Depreciation
We assume that the financial year ending is 31 December. So, for 2016, only 9 months of Annual Depreciation is to be recorded:
Buildings = $16,000*9/12 = $12,000
Machinery = $26,400*9/12 = $19,800
Equipment = $45,000*9/12 = $33,750
Part 2 - Journal entries to record
(1) Depreciation on the machinery sold on June 29, 2017
Book value of Machinery sold on June 29, 2017 as at March 31, 2016 = $90,000
Salvage value = 12%*$90,000 = $10,800
Estimated useful life = 8
Annual Depreciation = ($90,000 - $10,800) / 8 = $9,900
No. of months of Depreciation to be recoded before sales = 15 months (Jun 29, 2017 – Mar 31, 2016)
Depreciation amount = $9,900*15/12 = $12,375***
Depreciation for 2017 i.e. Jan 2017 to Jun 2017 = $9,900*6/12 = $4,950
Book value as on date of sale = $90,000 - $12,375 = $77,625
Sales value = $70,000
Loss on sale of Machinery = $77,625 - $70,000 = $7,625
Depreciation on Machinery sold $4,950
To Accumulated Depreciation $4,950
(2) Sale of machinery
Cash $70,000
Loss on sale of machinery $7,625
Accumulated Depreciation*** $12,375
To Machinery $90,000
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