Chapter 08 - Accounting for Long-Term Assets
VISUAL #8-1
FORMULAS FOR DEPRECIATION METHODS
1. STRAIGHT LINE
Cost - Estimated salvage
Estimated useful life
=
Annual
Depreciation
2. UNITS OF PRODUCTION
a)
b)
(Depreciable)
Cost - Estimated salvage
Cost per
=
Predicted units of production
Unit
CPU x units produced
in period
=
Depreciation
for PERIOD
(In last year, depreciate to estimated salvage value; never
depreciate below this amount.)
3. DOUBLE-DECLINING BALANCE
Book Value (beginning of year) x RATE* = Depreciation (for that year)
*RATE  The rate used is constant and it is twice what the
straight line rate would have been for this asset.
(In the last year, depreciate to estimated salvage value; never
depreciate below this amount.)
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Chapter 08 - Accounting for Long-Term Assets
Chapter Eight – Alternate Demonstration Problem #1
The New Times Company purchased a new machine on January 1, 2009.
The new machine cost $120,000, had an estimated useful life of five
years, and an estimated salvage value of $15,000 at the end of its useful
life. It was expected that the machine would produce 210,000 widgets
during its useful life.
The company used the machine for exactly three years. During these
three years, the annual production of widgets was 80,000, 50,000, and
30,000 units, respectively.
On January 1, 2013, the machine is sold for $45,000.
Required:
1.
Calculate the depreciation expense for each of the first three years
using:
a. Straight-line
b. Units-of-production
c. Double-declining-balance
2.
Prepare the proper journal entry for the sale of the machine under
each of the three different depreciation methods.
Solution: Chapter Eight – Alternate Demonstration Problem #1
1a.
Straight-line:
The depreciation expense each year is equal to cost minus salvage
value divided by useful life. In this example the cost is $120,000,
the salvage value is $15,000, and the useful life is 5 years.
Therefore, the annual depreciation expense would equal:
(120,000 - 15,000) ÷ 5 = $21,000 per year
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Chapter 08 - Accounting for Long-Term Assets
1b.
Units-of-production:
The depreciation expense each year is equal to a rate [(cost minus
salvage) divided by total production] multiplied by the actual
number of units produced that year. In this example, the rate would
be $0.50 per widget, (120,000 ÷ 15,000) ÷ 210,000, and the
depreciation expense for each of the first three years would be:
Year 1
Year 2
Year 3
1c.
.50
.50
.50
x
x
x
80,000
50,000
30,000
= 40,000
= 25,000
= 15,000
Double-declining balance:
The depreciation expense each year is equal to a rate (twice the
straight-line rate divided by useful life) multiplied by the asset’s net
book value (cost minus accumulated depreciation) at the beginning
of the year. In this example the rate would be 2/5, or 40%, and the
depreciation expense for each of the first three years would be:
Year 1
Year 2
Year 3
=
=
=
.40 x
.40 x
.40 x
120,000 (x) =
72,000 (1) =
43,200 (2) =
Book value at beginning of year:
(1) 120,000 – 48,000 = 72,000
(2) 120,000 – 48,000 – 28,800 = 43,200
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48,000
28,800
17,280
Chapter 08 - Accounting for Long-Term Assets
Solution: Chapter Eight – Alternate Demonstration Problem #1,
continued
2. The journal entry for the sale of the asset will have the same general
form regardless of the method of depreciation adopted, except that
whether there is a gain or a loss on the sale may change according to
the depreciation method used. The gain or loss on disposal of the
asset is determined by comparing the sale price, in this case $45,000,
with the net book value of the asset at the time of the sale.
Straight-line:
Cash ..........................................
Accumulated depreciation .....
Loss on sale of machine .........
Machine ..............................
45,000
63,000
12,000
120,000
Units-of-production:
Cash ..........................................
Accumulated depreciation
(40,000 + 25,000 + 15,000) ......
Machine ..............................
Gain on sale of machine ...
45,000
80,000
120,000
5,000
Double-declining balance:
Cash ..........................................
Accumulated depreciation
(48,000 + 28,800 + 17,280) ......
Machine ..............................
Gain on sale of machine ...
45,000
94,080
120,000
19,080
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