T 4

Tutorial
1. DuPage Company purchases a factory machine at a cost of $18,000 on January 1, 2010.

DuPage expects the machine to have a salvage value of $2,000 at the end of its 4-year useful
life.
During its useful life, the machine is expected to be used 160,000 hours.
Actual annual hourly use was: 2010, 40,000; 2011, 60,000; 2012, 35,000; and 2013, 25,000.
Instructions:
Prepare depreciation schedules for the following methods:
(a) straight-line,
Depreciable Cost= Purchasing Price-Salvage Value

= $18,000- $2000
= $16,000
Annual Depreciation Expense = Depreciable Cost/ Useful Life

= 16000/4
= $4000
Or, Rate of Depreciation= 100% / Number of Years of estimated useful life
= 100%/4
= 25%
Year Depreciabl Depreciation Annual Accumulate Book
e cost Rate Expense d Value
Depreciation
2010 16,000 25% 4,000 4,000 14,000
2011 16,000 25% 4,000 8,000 10,000
2012 16,000 25% 4,000 12,000 6,000
2013 16,000 25% 4,000 16,000 2,000
Short note: Book value= Purchasing Cost – Accumulated Depreciation

= 18,000 – 4,000
= 14,000
(b) units-of-activity, and
Depreciation cost per hour= Depreciable Cost / Total Units of Activity

= 16,000/1,60,000
= 0.1
Year Hours Used Rate per Annual Accumulate Book

Hour Dep.Expense d Value
Depreciation
2010 40,000 0.1 4000 4,000 14,000
2011 60,000 0.1 6000 10,000 8,000
2012 35,000 0.1 3500 13,500 4,500
2013 25,000 0.1 2500 16,000 2,000
(c) declining-balance using double the straight-line rate.
The rate of Depreciation for Declining method= (100%/Number_of_Years) * 2

= (100%/4)*2=50%
Year Beginning Declining Annual Accumulated Book
Book Value Balance Rate Expens Depreciation Value
e
2010 18,000 50% 9,000 9,000 9,000
2011 9,000 50% 4,500 13,500 4,500
2012 4,500 50% 2,250 15,750 2,250
2013 2,250 50% 1,125 16,875 1,125
2. On January 1, 2010, Skyline Limousine Co. purchased a limo at an acquisition cost of

$28,000. The vehicle has been depreciated by the straight-line method using a 4-year service
life and a $4,000 salvage value. The company’s fiscal year ends on December 31.
Instructions
Prepare the journal entry or entries to record the disposal of the limousine assuming that it was:
(a) Retired and scrapped with no salvage value on January 1, 2014.
(b) Sold for $5,000 on July 1, 2013.

= 28,000-4000
= 24,000
Depreciation Schedule of Straight line method:

Year Depreciabl Depreciation Annual Accumulate Book
e cost Rate Expense d Value
Depreciation
2010 24,000 25% 6,000 6,000 22,000
2011 24,000 25% 6,000 12,000 16,000
2012 24,000 25% 6,000 18,000 10,000
2013 24,000 25% 6,000 24,000 4,000
At the time of disposal,

Accumulated Depreciation 18,000 + (6000*6/12)=21,000
Book value was= 28,000-21,000=7,000
Disposals Loss: 5,000-7000=2000
Date Description Dr. $ Cr. $

(a) 1/1/2014 Accumulated Depreciation-Limousine 24,000
Loss on Disposal 4,000
Limo 28,000
(To record the retirement of Limo)
(b) 1/7/2013 Depreciation Expense(6000*6/12) 3,000
Accumulated Depreciation 3,000
(To record the depreciation to date of disposal)
Cash 5,000
Accumulated Depreciation 21,000
Loss on disposal 2,000
Limo 28,000
(To record sale of limousine)
59,000 59,000
3. At the beginning of 2008, Lehman Company acquired equipment costing $90,000. It was
estimated that this equipment would have a useful life of 6 years and a residual value of $9,000
at that time. The straight-line method of depreciation was considered the most appropriate to
use with this type of equipment. Depreciation is to be recorded at the end of each year.
During 2010 (the third year of the equipment’s life), the company’s engineers reconsidered their
expectations, and estimated that the equipment’s useful life would probably be 7 years (in total)
instead of 6 years. The estimated residual value was not changed at that time. However, during
2013 the estimated residual value was reduced to $5,000.
Instructions
Indicate how much depreciation expense should be recorded each year for this equipment, by
completing the following table.
Year Depreciation Expense

= 90,000-9000=81,000
Year Depreciable Depreciatio Accumulated Book Value

cost n Expense Depreciation
2008 81,000 13,500 13,500 76,500
2009 81,000 13,500 27,000 63,000
2010 54,000 10,800 10,800 52,200

2011 54,000 10,800 21,600 41,400
2012 54,000 10,800 32,400 30,600
2013 25,600 12,800 12,800 17,800

2014 25,600 12,800 25,600 5000
(9,000 – 9,000) /6 = 13,500 for 2008, 2009
[9,000 – (13,500x2)] = 63,000 Book value after two years. (7years-previous 2 years)
(63,000 – 9,000)/5 = 10,800 for 2010, 2011, 2012
[63,000 – (10,800 x 3)] = 30,600 Book value after the end of 5 years
(30,600 – 5,000)/2= 12,800 Depreciation for 2013 and 2014.(7years- previous 5 years)

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Tutorial

1. DuPage Company purchases a factory machine at a cost of $18,000 on January 1, 2010.

Depreciable Cost= Purchasing Price-Salvage Value

Annual Depreciation Expense = Depreciable Cost/ Useful Life

Short note: Book value= Purchasing Cost – Accumulated Depreciation

(b) units-of-activity, and

Depreciation cost per hour= Depreciable Cost / Total Units of Activity

Year Hours Used Rate per Annual Accumulate Book

(c) declining-balance using double the straight-line rate.

The rate of Depreciation for Declining method= (100%/Number_of_Years) * 2

2. On January 1, 2010, Skyline Limousine Co. purchased a limo at an acquisition cost of

Depreciable Cost= Purchasing Price-Salvage Value

Depreciation Schedule of Straight line method:

At the time of disposal,

Date Description Dr. $ Cr. $

Depreciable Cost= Purchasing Price-Salvage Value

Year Depreciable Depreciatio Accumulated Book Value

2010 54,000 10,800 10,800 52,200

2013 25,600 12,800 12,800 17,800

(9,000 – 9,000) /6 = 13,500 for 2008, 2009

(63,000 – 9,000)/5 = 10,800 for 2010, 2011, 2012

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