Online Accounting Course Simple Studies

Accounting Solution 8.1 (Accounting for Long-term Assets)

a) Straight-line method:
The formula to determine depreciation under this method is shown below:

(Historical Cost - Salvage Value) / Useful Life

So, the depreciation expense is calculated as follows:

($12,000 + $1,000 - $4,000) / 3 years = $3,000 per year

Double-declining balance method:

To begin with, we need to calculate the double-declining rate. This is done by multiplying the straight-line rate by 2: (100% / 3 years) x 2 = 66% (rounded). Next, in the table below we determine depreciation for three years:

Year

Book Value at
Beginning of Period

x

Double the
Straight-line
Rate

=

Depreciation
Expense

 

20X8

(13,000 - 0)

x

66%

=

$8,580

 

20X9

(13,000 - 8,580)

x

66%

=

$2,917.2

420

20X0

(13,000 - 1,502.8)

x

66%

=

$991.8

0

Remember that we do not subtract the salvage value from the purchase price under this method. Also note that in 20X9, only $420 can be depreciated to arrive at the salvage value, so we do not accept $2,917.2 provided by computations. The same is true for the last (20X0) year.

Units-of-production method:

We need to calculate the cost per unit as presented below:

(Historical Cost - Salvage Value) / Tons

So, the cost per ton is calculated as follows:

($12,000 + $1,000 - $4,000) / 30,000 = $0.3 per ton

The table below gives further computations:

Year

Year Cost
Per Unit

x

Number
of Units

=

Depreciation
Expense

20X8

0.3

x

8,000

=

$2,400

20X9

0.3

x

5,000

=

$1,500

20X0

0.3

x

17,000

=

$5,100

Sum-of-the-years method:

To begin with, we need to determine the factor. The sum of year digits is 3 + 2 + 1 = 6.

Next, in the the table below we calculate depreciation expense for three years:

Year

Depreciable
Cost *

x

Factor

=

Depreciation
Expense

20X8

9,000

x
3/6

=
$4,500

20X9

9,000

x
2/6

=
$3,000

20X0

9,000

x
1/6

=
$1,500

* Depreciable cost: ($12,000 + $1,000) - $4,000 = $9,000

b) The journal entries are below (double-declining depreciation expenses are show for three years):

Event No.

Account titles

Debit

Credit

1

 Equipment
    Cash		 13,000 13,000

2a
(20X4)

 Depreciation Expense
    Accumulated Depreciation		 8,580 8,580

2b
(20X5)

 Depreciation Expense
    Accumulated Depreciation		 420 420

2c
(20X6)

 Depreciation Expense
    Accumulated Depreciation		 0 0

3

 Cash
Accumulated Depreciation
Loss on Sale of Computer
     Equipment 		3,000
9,000
1,000 		13,000