Highsmith Rental Company purchased an apartment building early in 2021. There are 20 apartments in the building and each is furnished with major kitchen appliances. The company has decided to use the group depreciation method for the appliances. The following data are available: Appliance Cost Residual Value Service Life (in Years) Stoves $ 55,000 $ 4,000 6 Refrigerators 50,000 3,000 5 Dishwashers 48,000 2,000 4 In 2024, two new refrigerators costing $4,700 were purchased for cash. In that same year, the old refrigerators, which originally cost $5,500, were sold for $2,200. Required: 1. Calculate the group depreciation rate, group life, and depreciation for 2021. 2. Prepare the journal entries to record the purchase of the new refrigerators and the sale of the old refrigerators.

Highsmith Rental Company

1. The group depreciation rate is 19.24%.

The group life is 20 years.

The depreciation for 2021 is $30,340

2. Journal Entries:

Debit Refrigerators $4,700

Credit Cash $4,700

To record the the purchase of two new refrigerators for cash.

Debit Sale of Refrigerators $5,500

Credit Refrigerators $5,500

To transfer the cost of refrigerators to the Sale of Refrigerators account.

Debit Accumulated Depreciation $4,400

Credit Sale of Refrigerators $4,400

To transfer the accumulated depreciation to the Sale of Refrigerators account.

Debit $2,200

Credit Sale of Refrigerators $2,200

To record the sale of two old refrigerators for cash.

Debit Gain on Sale of Refrigerators $1,100

Credit Sale of Refrigerators $1,100

To record the gain on the sale of the old refrigerators.

Explanation:

a) Data and Calculations:

Appliance         Cost      Residual Value  Service Life  Depreciation

                                                                   (in Years)     Expense/year

Stoves        $ 55,000         $ 4,000               6                $8,500

Refrigerators 50,000           3,000                5                  9,400

Dishwashers 48,000           2,000                4                  11,500

Refrigerators   4,700                                     5                      940

Total           $157,700                                   20              $30,340

Group depreciation rate = 19.24%

b) It is assumed that the old refrigerators had an accumulated depreciation of $4,400 ($5,500/5 * 4).  Therefore, the gain from the sale of the refrigerators is $1,100 ($2,200 - $1,100).

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