Ch. 7
Complete the table below to calculate the gain or loss on the sale of the machinery. You will have to calculate the book value at the time of the sale using the information given.
Sale proceeds - Book value = Gain (loss) on sale ^accumulated depreciation is
As an asset is used in operations,...
accumulated depreciation increases • the book value of the asset decreases. Remember, the book value at the end of the asset's life must be its residual value.
Now, using the information given in the exercise and the total cost of the building that you determined above, calculate the depreciation expense on the building for the period of time from June 30, 20182018 to December 31, 20182018.
(cost - residual value) / useful life, in years x (months used / 12 ) = depreciation expense
double-declining-balance (DDB) method aka accelerated depreciation method
- an accelerated method of depreciation in which more depreciation expense is taken in the beginning years of an asset's life. This assumes that an asset is more productive, and producing more revenue, in the beginning years. This method computes annual depreciation by multiplying the asset's declining book value by a constant percentage, which is two times the straight-line depreciation rate. DDB amounts are computed as follows: ~ First, compute the straight-line depreciation rate per year. A truck with a 5-year useful life has a straight-line depreciation rate of 1/5, or 20%, each year. An asset with a 10-year useful life has a straight-line depreciation rate of 1/10, or 10%, and so on. ~ Second, multiply the straight-line rate by 2 to compute the DDB rate. For a 5-year asset, the DDB rate is 40% (20% x 2). A 10-year asset has a DDB rate of 20% (10% x 2). ;First, let's calculate the double-declining rate. (Round your final answer to two decimal places.) ~ Third, multiply the DDB rate by the period's beginning asset book value (cost - accumulated depreciation). Under the DDB method, ignore the residual value of the asset in computing depreciation, except during the last year. ~ Fourth, determine the final year's depreciation amount, that is, the amount needed to reduce the asset's book value to its residual value. The residual value should not be depreciated but should remain on the books until the asset is disposed of. Now calculate the double-declining depreciation expense for 2018. Remember that the asset's book value is now the cost reduced by the accumulated depreciation at the end of 2017.
Book value
Book value = cost - accumulated depreciation
Generally accepted accounting principles
Generally accepted accounting principles require that management of companies test both tangible and intangible long-term assets for impairment yearly. Impairment occurs when the expected future cash flows (which approximate the expected future benefits) from a long-term asset fall below the asset's net book (carrying) value (cost minus accumulated depreciation or amortization). If an asset is impaired, the company is required to adjust the carrying value downward from its book value to its fair value. In this case, fair value is based not on the expected future cash flows, but on the asset's estimated market value at the date of the impairment test.
Show the airplane's book value at the end of the first year under each depreciation method.
Remember, since this is the first year the asset has been in service, accumulated depreciation will be equal to depreciation expense. The cost will be the same for all three methods. Begin with the straight-line book value.
Depreciation
There are three major methods used to compute depreciation. Generally, each method computes a different amount of depreciation expense for each year, but the total depreciation over the life of the asset for all three methods will be the same. Residual values are not depreciated since the company expects to collect that amount at the end of the useful life. The depreciable basis of an asset is the cost less the residual value.
straight-line method
The straight-line method allocates an equal amount of depreciation to each year of the asset's useful life. Recall that we calculate straight-line depreciation on the depreciable cost of the asset. Recall that the straight-line method allocates an equal amount of depreciation to each year of the asset's useful life. Therefore, the calculation of the second year depreciation will be the same as the first year. [(Cost - Residual value) / Useful life, in years = Depreciation Expense]
units of production method
The units-of-production method allocates a fixed amount of depreciation for each unit of production. The depreciation expense varies each year based upon the number of units the asset produces in the year. Using the formula provided, let's calculate the depreciation per unit (in this example units = miles). (Round your final answer to two decimal places. Abbreviations used: prod. = production.) [(Cost - Residual value) / Useful life, in units of prod. = Depreciation per unit of output] Units-of-production (UOP) depreciation expense for 2017 Depreciation per unit (mile) x number of units (miles) = Depreciation expense (UOP)
Recording the sale of an asset
When recording the sale of an asset, you must remove the asset's cost and accumulated depreciation off the books. To remove the asset's cost and accumulated depreciation, you must reduce those accounts by their balances at the time of the sale. You must also increase Cash for the amount of proceeds received, and then adjust the Gain or Loss account accordingly. Remember that in the previous step, we determined that the sale resulted in a loss of $360,000. (Record debits, then credits)
depreciable cost
depreciable cost - assets cost - estimated residual value