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ABC bought a machine on January 1, 2014 where the company was charged for
$21,000 which was paid. ABC also paid $3,000 for setup. The company signed a
long-term note payable of $6,000. The machine is expected to be useful for five
years with a residual value of $2,000. The machine is expected to produce 10,000
in first year, 8,000 in second, 6,000 in third, 4,000 in fourth, and 2,000 in the last
year (total units of production 30,000 units)
Required:
1.Journalize the purchase transaction on January 1, 2014.
2.Prepare the depreciation schedule assuming that company uses:
. a) The straight-line method
. b) Units of production
3.Journalize the depreciation transaction on December 31, 2015.
4.Which method would produce the highest income for 2015?
5.For income tax purposes for 2015, which method would the company prefer?
1. Purchase transaction:
Dr. Machine.................................................. 30,000
Cr. Cash (21,000 + 3,000) ........................ 24,000
Cr. Note payable..................................... 6,000

Date Depreciable Depreciation Accumulated Book value
cost Expense depreciation
12-31-2014 28,000 5,600 5,600 24,400
2-31-2015 28,000 5,600 11,200 18,800
12-31-2016 28,000 5,600 16,800 13,200
2-31-2017 28,000 5,600 22,400 7,600
12-31-2018 28,000 5,600 28,000 2,000
Date Depreciable Depreciation Units Depreciation

cost rate produced per expense
(28,000/30,000 year
)
12-31-2014 28,000 0.93 10,000 9,300
2-31-2015 28,000 0.93 8,000 7440
12-31-2016 28,000 0.93 6000 5,580
2-31-2017 28,000 0.93 4000 3,720
12-31-2018 28,000 0.93 2000 1,860
C) a. Dr. depreciation expense 5,600

Cr. Accumulated depreciation 5,600
b. Dr. depreciation expense 9,300
Cr. Accumulated depreciation 9,300
4. Straight-line method
5. double decline method/ in our case, it will be units of production
On January 9, 20X6, J. T. Orlando Co. paid $240,000 for a computer system. In

addition to the basic purchase price, the company paid a setup fee of $2,000,
$8,000 sales tax, and $30,000 for a special platform on which to place the
computer. J. T. Orlando management estimates that the computer will remain in
service for five years and have a residual value of $20,000. The computer will
process 30,000 documents the first year, with annual processing decreasing by
2,500 documents during each of the next four years (that is, 27,500 documents in
year 20X7; 25,000 documents in year 20X8; and so on). In trying to decide which
depreciation method to use, the company president has requested a depreciation
schedule for each of the two depreciation methods (straight-line and units-of-
production)
Asset cost: $240,000 + $2,000 + $8,000 + $30,000 = 280,000
Depreciation for each year: ($280,000 − $20,000) / 5 years = $52,000
Date Depreciable Depreciation Accumulated Book value

cost Expense depreciation
12-31-2016 260,000 52,000 52,000 228,000
2-31-2017 260,000 52,000 104,000 176,000
12-31-2018 260,000 52,000 156,000 124,000
2-31-2019 260,000 52,000 208,000 72,000
12-31-2020 260,000 52,000 260,000 20,000

Date Depreciable Depreciation Units Depreciation
cost rate produced expense
(260,000/125,000) per year
12-31-2016 260,000 2.08 30,000 62,400
2-31-2017 260,000 2.08 27,500 57,200
12-31-2018 260,000 2.08 25,000 52,000
2-31-2019 260,000 2.08 22,500 46,800
12-31-2020 260,000 2.08 20,000 41,600

On January 1, 2010, XYZ Co purchased equipment for $550,000. XYZ expects the
equipment to remain useful for 5 years and to have a residual value of $50,000.
The company uses the straight-line method to depreciate its equipment. The
company used the equipment for two years and sold it on January 1, 2012 for
$370,000.
Required:
1. Record the sale of the equipment on January 1, 2012.

2. Record the sale of the equipment on January 1, 2012 assuming it was sold
for $340,000.
Depreciation expense = 550,000 – 50,000/5 = $100,000
Accumulated depreciation on Jan 1, 2012 = 100,000 X 2 = 200,000
Cash received = 370,000
Book value = 550,000 – 200,000 = 350,000
Gain on sale = 20,000
Entry:
Cash 370,000
Accumulated depreciation 200,000
Equipment 550,000
Gain on sale of equipment 20,000
Entry
Cash 340,000
Accumulated depreciation 200,000

Loss on sale 10,000
Equipment 550,000
Intangibles and Amortization
Suppose ABC pays $170,000 to acquire a patent on January 1, and the business
believes the useful life is 5 years
Dr. Patent 170,000
Cr. Cash 170,000
Amortization
Dr. Amortization expense (170,000/5) 34,000
Cr. Accumulated amortization/ patent 34,000
If there is no lifetime, the asset is tested for impairment
The carrying amount of a factory was $700 million. The recoverable amount was
$300 million. Toshiba recognized an impairment loss of $400 million with the
following journal entry
Dr. Impairment loss 400,000,000
Cr. Accumulated depreciation and impairment loss 400,000,000
If the asset was intangible one
We will do the following
Dr. impairment loss
Cr. (the intangible assets itself)

Natural resources and depletion
An oil lease costs Royal Dutch Shell $100,000 and contain an estimated 10,000
barrels of oil. If 3,000 barrels are extracted (assuming the company paid cash, $10
a barrel)
Dr. Depletion expense (3000*10) 30,000

Cr. Accumulated Depletion 30,000

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ABC bought a machine on January 1, 2014 where the company was charged for

1.Journalize the purchase transaction on January 1, 2014.

2.Prepare the depreciation schedule assuming that company uses:

. a) The straight-line method

3.Journalize the depreciation transaction on December 31, 2015.

4.Which method would produce the highest income for 2015?

Dr. Machine.................................................. 30,000

Cr. Cash (21,000 + 3,000) ........................ 24,000

Cr. Note payable..................................... 6,000

2-31-2015 28,000 5,600 11,200 18,800

12-31-2016 28,000 5,600 16,800 13,200

2-31-2017 28,000 5,600 22,400 7,600

12-31-2018 28,000 5,600 28,000 2,000

Date Depreciable Depreciation Units Depreciation

2-31-2015 28,000 0.93 8,000 7440

12-31-2016 28,000 0.93 6000 5,580

2-31-2017 28,000 0.93 4000 3,720

12-31-2018 28,000 0.93 2000 1,860

C) a. Dr. depreciation expense 5,600

On January 9, 20X6, J. T. Orlando Co. paid $240,000 for a computer system. In

Depreciation for each year: ($280,000 − $20,000) / 5 years = $52,000

Date Depreciable Depreciation Accumulated Book value

2-31-2017 260,000 52,000 104,000 176,000

12-31-2018 260,000 52,000 156,000 124,000

2-31-2019 260,000 52,000 208,000 72,000

12-31-2020 260,000 52,000 260,000 20,000

2-31-2017 260,000 2.08 27,500 57,200

12-31-2018 260,000 2.08 25,000 52,000

2-31-2019 260,000 2.08 22,500 46,800

12-31-2020 260,000 2.08 20,000 41,600

1. Record the sale of the equipment on January 1, 2012.

Depreciation expense = 550,000 – 50,000/5 = $100,000

Accumulated depreciation on Jan 1, 2012 = 100,000 X 2 = 200,000

Cash received = 370,000

Book value = 550,000 – 200,000 = 350,000

Gain on sale = 20,000

Accumulated depreciation 200,000

Intangibles and Amortization

Dr. Patent 170,000

Cr. Cash 170,000

Dr. Amortization expense (170,000/5) 34,000

Cr. Accumulated amortization/ patent 34,000

If there is no lifetime, the asset is tested for impairment

Dr. Impairment loss 400,000,000

Cr. Accumulated depreciation and impairment loss 400,000,000

If the asset was intangible one

We will do the following

Dr. impairment loss

Cr. (the intangible assets itself)

Dr. Depletion expense (3000*10) 30,000

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