Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
Question
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Chapter 8, Problem 1ECOMP

1. a.

To determine

Prepare a partial depreciation expense schedule for office equipment under double-declining-balance method for 2014, 2015, and 2016.

1. a.

Expert Solution
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Explanation of Solution

Double-declining-balance method:

The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life is referred to as double-declining-balance method.

Formula for double-declining-balance depreciation method:

Depreciation expense}=(Book value at the beginning of the period )  ×    Depreciation rate(Cost–Accumulated depreciation)×2Useful life

Depreciation schedule under double-declining-balance method:

YearComputationDepreciation ExpenseAccumulated DepreciationNet Book Value
At Acquisition   $60,000
2014($60,000$0)×23$40,000 $40,000 20,000
2015($60,000$40,000)×235,00045,00015,000
2016Fully depreciated045,00015,000

Table (1)

Note: The net book value of the asset cannot be less than the residual value of such asset. Hence, calculate the depreciation expense as given in the working note below.

Working Note:

Compute depreciation expense in Year 2015.

Depreciation in 2015 =(Cost–Accumulated depreciation in 2014–Residual value)=$60,000–$40,000–$15,000=$5,000

b.

To determine

Prepare a partial depreciation expense schedule for factory equipment under units-of-production method for 2014, 2015, and 2016.

b.

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Explanation of Solution

Units-of-production method:

The depreciation method which assumes that the consumption of economic benefits of long-term asset is based on the production capacity or output is referred to as units-of-production method.

Formula for units-of-production depreciation method:

Depreciation expense}=Depreciable cost   ×    Depreciation rate(Cost–Residual value)×Actual productionEstimated total production

Depreciation schedule under units-of-production method:

YearComputationDepreciation ExpenseAccumulated DepreciationNet Book Value
At Acquisition   $880,000
2014($880,000+$20,000)×8,000hours100,000 hours$72,000 $72,000 828,000
2015($880,000+$20,000)×9,200hours100,000 hours82,800154,800745,200
2016($880,000+$20,000)×8,900hours100,000 hours80,100234,900665,100

Table (2)

2.

To determine

Prepare the journal entry to record the sale of the factory equipment.

2.

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Explanation of Solution

Straight-line Depreciation:

Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

Depreciation = (Cost of the assetResidual value)Estimated useful life of the asset

Prepare the journal entry to record the sale of the shelving units.

DateAccount title and explanationPost ref.

Debit

(In $)

Credit

(In $)

Cash 700,000
Accumulated depreciation (Refer Requirement 1.b.)234,900
Gain on disposal (2)34,900
Factory equipment900,000
(To record the disposal of the factory equipment)

Table (3)

Working Notes:

Calculate the gain (loss) on sale of the equipment.

Sale proceed$700,000
Cost of the equipment$900,000
Less: Accumulated depreciation$234,900
Less: Book value$665,100
Gain on sale of equipment …… (2)$34,900

Table (4)

Record the sale of the shelving units:

  • Cash is an asset. Sale of factory equipment increase the cash balance. Thus, cash account is debited.
  • Accumulated depreciation is a contra asset. It decreases the asset value. Thus, accumulated depreciation account is debited.
  • Gain on disposal is a component of the retained earnings. It increases the retained earnings. Thus, gain on disposal account is credited.
  • Factory equipment is the asset. Sale of factory equipment decreases the value of the asset. Thus, factory equipment account is credited.

3.

To determine

Ascertain the amount that the company would report on the income statement regarding the patent on January 1, 2017 and to explain the answer.

3.

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Explanation of Solution

Amortization expense:

The expense which reflects the usage of intangible asset by the way of reducing the cost of the asset for the estimated useful definite life is referred to as amortization expense.

Formula for amortization expense:

Amortization expense=Cost of intangible asset×1Useful life

Asset impairment:

Asset impairment arises when the carrying value of the assets recorded on the balance sheet of the company exceeds its estimated future cash inflows.

Accounting treatment:

The asset impairment is accounted for in the following way:

The purchase value of the asset will be written down to its fair value and it will be recorded as a loss at such value.

Compute amortization expense of patent.

Amortization expense =Cost of intangible asset×1Useful life= $330,000×115 years= $22,000

Compute the net book value of the patent.

ParticularsAmount ($)Amount ($)
Original cost of the patent 330,000
Less: Accumulated depreciation 66,000
Net Book Value of the patent$264,000

Table (5)

Compute the amount of impairment loss to be recorded on January 1, 2017.

ParticularsAmount ($)
Book value of patent264,000
Less: Fair value of patent 190,000
Impairment loss to be recorded on January 1, 2017$74,000

Table (6)

The book value of the copyright exceeds its estimated future cash inflows. Hence, the asset is impaired, and the company would report an impairment loss of $74,000 on the income statement regarding the patent on January 1, 2017.

Working Note:

Calculate the accumulated depreciation of the patent.

Accumulated depreciation=(Depreciation expense per year×Numberof years the asset has been used)=$22,000×3years (January 2014 to January 2017 )=$66,000

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Chapter 8 Solutions

Financial Accounting, 8th Edition

Ch. 8 - Prob. 11QCh. 8 - Prob. 12QCh. 8 - Prob. 13QCh. 8 - Prob. 14QCh. 8 - Prob. 15QCh. 8 - Why is depreciation expense added to net income...Ch. 8 - Prob. 1MCQCh. 8 - Prob. 2MCQCh. 8 - Prob. 3MCQCh. 8 - Prob. 4MCQCh. 8 - Prob. 5MCQCh. 8 - Prob. 6MCQCh. 8 - Prob. 7MCQCh. 8 - Prob. 8MCQCh. 8 - Prob. 9MCQCh. 8 - (Chapter Supplement) Irish Industries purchased a...Ch. 8 - Prob. 1MECh. 8 - Prob. 2MECh. 8 - Prob. 3MECh. 8 - Prob. 4MECh. 8 - Computing Book Value (Double-Declining-Balance...Ch. 8 - Computing Book Value (Units-of-Production...Ch. 8 - Identifying Asset Impairment LO8-4 For each of the...Ch. 8 - Prob. 8MECh. 8 - Prob. 9MECh. 8 - Prob. 10MECh. 8 - Prob. 1ECh. 8 - Prob. 2ECh. 8 - Computing and Recording Cost and Depreciation of...Ch. 8 - Prob. 4ECh. 8 - Prob. 5ECh. 8 - Prob. 6ECh. 8 - Prob. 7ECh. 8 - Computing Depreciation under Alternative Methods...Ch. 8 - Prob. 9ECh. 8 - Prob. 10ECh. 8 - Computing Depreciation and Book Value for Two...Ch. 8 - Prob. 12ECh. 8 - Prob. 13ECh. 8 - Prob. 14ECh. 8 - Prob. 15ECh. 8 - Prob. 16ECh. 8 - Prob. 17ECh. 8 - Prob. 18ECh. 8 - Prob. 19ECh. 8 - Prob. 20ECh. 8 - Prob. 21ECh. 8 - Prob. 22ECh. 8 - Prob. 23ECh. 8 - Prob. 1PCh. 8 - Prob. 2PCh. 8 - Prob. 3PCh. 8 - Prob. 4PCh. 8 - Evaluating the Effect of Alternative Depreciation...Ch. 8 - Prob. 6PCh. 8 - Prob. 7PCh. 8 - Prob. 8PCh. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - Prob. 11PCh. 8 - Prob. 1APCh. 8 - Prob. 2APCh. 8 - Computing the Acquisition Cost and Recording...Ch. 8 - Prob. 4APCh. 8 - Prob. 5APCh. 8 - Prob. 6APCh. 8 - Prob. 7APCh. 8 - Prob. 1ACOMPCh. 8 - Prob. 1BCOMPCh. 8 - Prob. 1CCOMPCh. 8 - Prob. 1DCOMPCh. 8 - Prob. 1ECOMPCh. 8 - Prob. 1CPCh. 8 - Prob. 2CPCh. 8 - Prob. 3CPCh. 8 - Prob. 4CPCh. 8 - Prob. 5CPCh. 8 - Prob. 6CPCh. 8 - Prob. 7CPCh. 8 - Prob. 9CPCh. 8 - Prob. 1CC
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