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