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in class prob solutions

# in class prob solutions - Mikhail B Pevzner and George...

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© Mikhail B. Pevzner and George Mason University Problem 1: On April 1, 2008, MBP acquires a machine with expected useful life of 20 years and expected salvage value of \$100,000. In exchange for a machine, MBP pays \$100,000 and issues 10,000 5% preferred shares with par value of \$100. At the time of the transaction preferred shares are traded on a local exchange at \$200. MBP spends \$10,000 in machine installation costs. On December 31, 2010, MBP sells the machine for \$1.5 million. Determine the accounting for the machine up until and including sale time, assuming MBP uses: 1) straight line depreciation method 2) double-declining depreciation method Solution: Acquisition of the machine: Dr. Machine \$2,110,000 Cash \$110,000 Preferred stock-par \$1,000,000 Additional paid-in capital \$1,000,000 Depreciation expense (straight line method): December 31, 2008: 9/12*(2,110,000-100,000)/20=\$75,375 December 31, 2009/10: (2,110,000-100,000)/20=\$100,500 Accumulated depreciation before sale=75,375+2*100,500=\$276,375 Journal entry for the sale: Accumulated depreciation \$276,375 Cash \$1,500,000 Loss on sale \$333,625 Machine 2,110,000 Depreciation expense (double declining balance method): On 12 month schedule the machine depreciation schedule looks as follows (only first three years): 1-Apr-09 1-Apr-10 1-Apr-11 Beginning Book Value \$2,110,000.00 \$1,899,000.00 \$1,709,100.00 Depreciation expense \$ (211,000.00) \$ (189,900.00) \$ (170,910.00) Ending Book Value \$1,899,000.00 \$1,709,100.00 \$1,538,190.00

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© Mikhail B. Pevzner and George Mason University Because the first year is the partial year, we only need to take 9/12 of the first year’s depreciation expense.
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