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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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