The company’s fiscal year ends on December 31. Using the following information, compute depreciation for this machine for each of the 4 years using each of the following methods:
Straight-line method
Sum-of-years method
Double-declining method
Units-of-production
Year
Machine Hours
20X1
2,000
20X2
3,500
20X3
1,500
20X4
6,000
The ABC car repair shop purchased a machine in 20X1 at a cost of $20,000. The tractor was sold for $2,000 in 20X3. Depreciation recorded through the disposal totaled $16,000.
Prepare the journal entry to record the sale.
If the machine was sold for $10,000, what will the entry be?
The ABC car repair shop traded a new machine for an older model. The old model’s book value was $150,000 (original cost $350,000, less $200,000 accumulated depreciation) and its fair value was $200,000. ABC paid $40,000 to complete the exchange.
Prepare the journal entry to record the exchange.
To compute the depreciation for each of the four years using different methods, we first need to understand the formulas for each method. Let's go through each method one by one:
1. Straight-line method:
The straight-line method calculates depreciation by evenly spreading the cost of the asset over its useful life. The formula to calculate straight-line depreciation is:
Depreciation Expense = (Cost of Asset - Salvage Value) / Useful Life
In this case, since we don't have the salvage value or the useful life of the machine, we cannot calculate the straight-line depreciation.
2. Sum-of-years method:
The sum-of-years method allocates more depreciation to the early years and less to the later years of an asset's life. The formula to calculate sum-of-years depreciation is:
Depreciation Expense = (Remaining Life / Sum of Years) * (Cost of Asset - Salvage Value)
To calculate the sum of years, we add together the numbers from 1 to the useful life of the asset. In this case, the useful life is not provided, so we cannot calculate the sum-of-years depreciation.
3. Double-declining method:
The double-declining method is an accelerated depreciation method that assigns more depreciation to the early years of an asset's life. The formula to calculate double-declining depreciation is:
Depreciation Expense = (1 / Useful Life) * 2 * (Cost of Asset - Accumulated Depreciation)
To calculate the depreciation for each year using the double-declining method, we need to know the useful life of the machine and the accumulated depreciation at the beginning of each year. Since this information is not provided, we cannot calculate the double-declining depreciation.
4. Units-of-production method:
The units-of-production method allocates depreciation based on the number of units produced. The formula to calculate units-of-production depreciation is:
Depreciation Expense = (Cost of Asset - Salvage Value) * (Machine Hours / Total Estimated Machine Hours)
To calculate the depreciation for each year using the units-of-production method, we can use the given machine hours and the cost and salvage value of the machine.
Year 1:
Depreciation Expense = ($20,000 - $2,000) * (2,000 / (2,000 + 3,500 + 1,500 + 6,000))
Year 2:
Depreciation Expense = ($20,000 - $2,000) * (3,500 / (2,000 + 3,500 + 1,500 + 6,000))
Year 3:
Depreciation Expense = ($20,000 - $2,000) * (1,500 / (2,000 + 3,500 + 1,500 + 6,000))
Year 4:
Depreciation Expense = ($20,000 - $2,000) * (6,000 / (2,000 + 3,500 + 1,500 + 6,000))
Now let's move on to the next part of the question regarding the journal entries.
1. Journal entry to record the sale of the machine for $2,000:
Date | Account | Debit | Credit
YYYY-MM-DD | Accumulated Depreciation | $16,000 |
| Equipment | | $20,000
| Cash | $2,000 |
2. Journal entry to record the sale of the machine for $10,000:
Date | Account | Debit | Credit
YYYY-MM-DD | Accumulated Depreciation | $16,000 |
| Equipment | | $20,000
| Loss on Sale | $2,000 |
| Cash | | $10,000
3. Journal entry to record the exchange of the old machine with a book value of $150,000 for a new machine and paying $40,000:
Date | Account | Debit | Credit
YYYY-MM-DD | Accumulated Depreciation | $200,000 |
| Equipment | | $150,000
| Cash | $40,000 |
| Accumulated Depreciation | | $200,000
| Equipment (new) | | $200,000
| Gain on Exchange | $50,000 | |
Please note that the journal entries provided are general examples and may need adjustments based on additional information or specific accounting principles.