Concept explainers
Case E. Matson Company purchased the following on January 1, 2016:
- Office equipment at a cost of $60,000 with an estimated useful life to the company of three years and a residual value of $15,000. The company uses the double-declining-balance method of
depreciation for the equipment. - Factory equipment at an invoice price of $880,000 plus shipping costs of $20,000. The equipment has an estimated useful life of 100,000 hours and no residual value. The company uses the units-of-production method of depreciation for the equipment.
- A patent at a cost of $330,000 with an estimated useful life of 15 years. The company uses the straight-line method of amortization for intangible assets with no residual value.
The company’s year ends on December 31.
- 1. Prepare a partial depreciation schedule for 2016, 2017, and 2018 for the following assets (round your answers to the nearest dollar):
- a. Office equipment.
- b. Factory equipment. The company used the equipment for 8,000 hours in 2016, 9,200 hours in 2017, and 8,900 hours in 2018.
- 2. On January 1, 2019. Matson altered its corporate strategy dramatically. The company sold the factory equipment for $700,000 in cash. Record the entry related to the sale of the factory equipment.
- 3. On January 1, 2019. when the company changed its corporate strategy, its patent had estimated future cash flows of $210,000 and a fair value of $190,000. What would the company report on the income statement (account and amount) regarding the patent on January 1, 2019? Explain your answer.
1. a.
Prepare a partial depreciation expense schedule for office equipment under double-declining-balance method for 2016, 2017, and 2018.
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 schedule under double-declining-balance method:
Year | Computation | Depreciation Expense | Accumulated Depreciation | Net Book Value |
At Acquisition | $60,000 | |||
2016 | $40,000 | $40,000 | 20,000 | |
2017 | 5,000 | 45,000 | 15,000 | |
2018 | Fully depreciated | 0 | 45,000 | 15,000 |
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 2017.
b.
Prepare a partial depreciation expense schedule for factory equipment under units-of-production method for 2016, 2017, and 2018.
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 schedule under units-of-production method:
Year | Computation | Depreciation Expense | Accumulated Depreciation | Net Book Value |
At Acquisition | $880,000 | |||
2016 | $72,000 | $72,000 | 828,000 | |
2017 | 82,800 | 154,800 | 745,200 | |
2018 | 80,100 | 234,900 | 665,100 |
Table (2)
2.
Prepare the journal entry to record the sale of the factory equipment.
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:
Prepare the journal entry to record the sale of the shelving units.
Date | Account title and explanation | Post ref. |
Debit (In $) |
Credit (In $) |
Cash | 700,000 | |||
Accumulated depreciation (Refer Requirement 1.b.) | 234,900 | |||
Gain on disposal (2) | 34,900 | |||
Factory equipment | 900,000 | |||
(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) | $34,900 |
Table (4)
Record the sale of the shelving units:
- Cash is an asset. Sale of factory equipment increase the cash balance. Thus, cash account is debited.
- Accumulated depreciation is a contra asset. It decreases the asset value. Thus, accumulated depreciation account is debited.
- Gain on disposal is a component of the retained earnings. It increases the retained earnings. Thus, gain on disposal account is credited.
- Factory equipment is the asset. Sale of factory equipment decreases the value of the asset. Thus, factory equipment account is credited.
3.
Ascertain the amount that the company would report on the income statement regarding the patent on January 1, 2019 and to explain the answer.
Explanation of Solution
Amortization expense:
The expense which reflects the usage of intangible asset by the way of reducing the cost of the asset for the estimated useful definite life is referred to as amortization expense.
Formula for amortization expense:
Asset impairment:
Asset impairment arises when the carrying value of the assets recorded on the balance sheet of the company exceeds its estimated future cash inflows.
Accounting treatment:
The asset impairment is accounted for in the following way:
The purchase value of the asset will be written down to its fair value and it will be recorded as a loss at such value.
Compute amortization expense of patent.
Compute the net book value of the patent.
Particulars | Amount ($) | Amount ($) |
Original cost of the patent | 330,000 | |
Less: Accumulated depreciation | 66,000 | |
Net Book Value of the patent | $264,000 |
Table (5)
Compute the amount of impairment loss to be recorded on January 1, 2019.
Particulars | Amount ($) |
Book value of patent | 264,000 |
Less: Fair value of patent | 190,000 |
Impairment loss to be recorded on January 1, 2019 | $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, 2019.
Working Note:
Calculate the accumulated depreciation of the patent.
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Chapter 8 Solutions
Financial Accounting
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