Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 9 Fixed Assets and Intangible Assets 421

McCollum Company, a furniture wholesaler, acquired new equipment at a cost of $150,000

at the beginning of the fiscal year. The equipment has an estimated life of five years and an

estimated residual value of $12,000. Ellen McCollum, the president, has requested information

regarding alternative depreciation methods.

Instructions

1. Determine the annual depreciation for each of the five years of estimated useful life of the
   equipment, the accumulated depreciation at the end of each year, and the book value of the
   equipment at the end of each year by using (a) the straight-line method and (b) the declining-
   balance method (at twice the straight-line rate).


2. Assume that the equipment was depreciated under the declining-balance method. In the
   first week of the fifth year, the equipment was sold for $25,000. Record the entry for the sale.

Solution

1.

Depreciation Accumulated Depreciation, Book Value,

Year Expense End of Year End of Year

a. 1 $27,600* $ 27,600 $122,400

2 27,600 55,200 94,800

3 27,600 82,800 67,200

4 27,600 110,400 39,600

5 27,600 138,000 12,000

*$27,600($150,000$12,000) 5

b. 1 $60,000** $ 60,000 $ 90,000

2 36,000 96,000 54,000

3 21,600 117,600 32,400

4 12,960 130,560 19,440

5 7,440*** 138,000 12,000

**$60,000$150,00040%

***The asset is not depreciated below the estimated residual value of $12,000.

2.

ILLUSTRATIVE ACCOUNTING APPLICATION PROBLEM

PatentsExclusive rights to produce and sell goods with one
or more unique features.

Residual valueThe estimated value of a fixed asset at the
end of its useful life.

Revenue expendituresCosts that benefit only the current
period or costs incurred for normal maintenance and repairs
of fixed assets.

Straight-line methodA method of depreciation that pro-

vides for equal periodic depreciation expense over the esti-

mated life of a fixed asset.

TrademarkA name, term, or symbol used to identify a busi-

ness and its products.

Units-of-production methodA method of depreciation

that provides for depreciation expense based on the expected

productive capacity of a fixed asset.

Cash 25,000

Accumulated Depreciation—Equipment 130,560

Equipment 150,000

Gain on Disposal of Fixed Assets 5,560