ew tire retreading equipment, acquired at a cost of $140,000 at the beginning of
ID: 2770019 • Letter: E
Question
ew tire retreading equipment, acquired at a cost of $140,000 at the beginning of a fiscal year, has an estimated useful life of four years and an estimated residual value of $10,000. 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 $23,300. Instructions 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. The following columnar headings are suggested for each schedule: Year Depreciation Expense Accumulated Depreciation, End of Year Book value, End of Year 2. Illustrate the effects on the accounts and financial statements of the sale. 3. Illustrate the effects on the accounts and financial statements of the sale, assuming a sale price of $15,250 instead of $23,300.
Explanation / Answer
The original Depreciation schedule would be as follows
Depreciation for first yesr would be 2/4*140000 =70,000
So if the machine is sold for 23000 at the end of years
Book value = 17500
Market value =23000
hence capial gain woudl be = 23000-17500 =5500
Tax = firm tax rate *5500
3. Illustrate the effects on the accounts and financial statements of the sale, assuming a sale price of $15,250 instead of $23,300
Here the market valeu = 15250
Hence therf would be loss of = 17500*15250
= (2250)
Tax that can be offsset is
= firm tax rate*(2250)
earBook Value
Year Start Depreciation
Percent Depreciation
Expense Accumulated
Depreciation Book Value
Year End 2011 $140,000 50.00% $70,000 $70,000 $70,000 2012 $70,000 50.00% $35,000 $105,000 $35,000 2013 $35,000 50.00% $17,500 $122,500 $17,500 2014 $17,500 42.86% $7,500 $130,000 $10,00
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