New lithographic equipment, acquired at a cost of $800,000 on March 1 at the beginning of a fiscal year, has an estimated useful life of five years and an estimated residual value of $90,000. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year. In the first week of the fifth year, on March 4, the equipment was sold for $135,000. Required:
a. Determine the annual depreciation expense for each of the estimated five years of use, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by (a) the straight-line method and (b) the double-declining-balance method.
b. Journalize the entry to record the sale assuming the manager chose the double-declining-balance method.
c. On January 1, journalize the entry to record the sale in (b), assuming that the equipment was sold for $88,750 instead of $135,000.

a. Determine the annual depreciation expense for each of the estimated five years of use, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by:

(a) the straight-line method

depreciation expense per year = ($800,000 - $90,000) / 5 years = $142,000

End of year            depreciation expense          book value

1                                  $142,000                           $658,000

2                                 $142,000                           $516,000

3                                 $142,000                           $374,000

4                                 $142,000                           $232,000

and (b) the double-declining-balance method.

depreciation expense year 1 = 2 x 1/5 x $800,000 = $320,000

depreciation expense year 1 = 2 x 1/5 x $480,000 = $192,000

depreciation expense year 1 = 2 x 1/5 x $288,000 = $115,200

depreciation expense year 1 = 2 x 1/5 x $172,800 = $69,120

End of year            depreciation expense          book value

1                                  $320,000                           $480,000

2                                 $192,000                            $288,000

3                                 $115,200                              $172,800

4                                 $69,120                               $103,680

b. Journalize the entry to record the sale assuming the manager chose the double-declining-balance method.

Dr Cash 135,000

Dr Accumulated depreciation - lithographic equipment 696,320

    Cr Lithographic equipment 800,000

    Cr Gain on sale 31,320

c. Journalize the entry to record the sale in (b), assuming that the equipment was sold for $88,750 instead of $135,000.

Dr Cash 88,750

Dr Accumulated depreciation - lithographic equipment 696,320

Dr Loss on sale 14,930

    Cr Lithographic equipment 800,000

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