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04_Chapters7,8,9

# 04_Chapters7,8,9 - BUS 214 Financial Accounting...

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DeprecEx BUS 214, Financial Accounting Depreciation Exercise Depreciation methods: Straight-line — (Cost - Estimated Salvage)/(Estimated Useful Life) Double-declining-balance — (Beginning of year Book Value) x (1/Estimated Useful Life) x 2 Switch to Straight-line depreciation in the year when Straight-line depreciation is greater than Double-declining-balance depreciation The formula for Straight-line depreciation in this instance is: (Beginning of year Book value - Estimated Salvage)/(Estimated Remaining Life) Sum-of-the-years’-digits — (Cost - Estimated Salvage) x (Estimated Useful Life - Age)/(Year Sum) Assumed facts: Cost of equipment \$120,000 Estimated salvage value \$10,000 Estimated useful life 10 years Required: A. Calculate depreciation for each of the 10 years of the useful life of the equipment, using— 1. The straight-line method, 2. The Double-declining-balance method (with and without switch-over to Straight-line), and 3. The Sum-of-the-years’-digits method. B. Prepare journal entries to record depreciation expense on the above equipment during the first 2 years of its useful life, using the straight-line method.

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Cost \$900,000 Life in years 10 Salvage \$30,000 Beginning of year Beginning of year Double-declining Depreciation Accumulated Book -balance Straight-line Expense Year Cost Depreciation Value Depreciation Depreciation Recorded 1 900,000 0 900,000 180,000 87,000 180,000 2 900,000 180,000 720,000 144,000 76,667 144,000 3 900,000 324,000 576,000 115,200 68,250 115,200 4 900,000 439,200 460,800 92,160 61,543 92,160 5 900,000 531,360 368,640 73,728 56,440 73,728 6 900,000 605,088 294,912 58,982 52,982 58,982 7 900,000 664,070 235,930 47,186 51,482 51,482 8 900,000 715,553 184,447 51,482 9 900,000 767,035 132,965 51,482 Double-Declining-Balance Depreciation with Switchover to Straight-Line 10 900,000 818,517 81,483 51,483 900,000 870,000 30,000 870,000 DDB formula: (Book value) x 1/Life x 2 SL formula: [(Book value) - Salvage]/(Remaining life) Journal entries each year Depreciation expense Accumulated depreciation--Equipment Retained earnings Depreciation expense Journal entry at the end of year 8, assuming the asset was sold at Salvalge value
Cost xx,xxx xx,xxx xx,xxx etc. Accumulated depreciation -- Equipment Fixed Assets and Accumulated Depreciation Equipment

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1 DeprecExSol BUS 214, Financial Accounting Solution to Depreciation Exercise A. Depreciation expense computations. 1. Straight-line method. Year 1: (\$120,000 - \$10,000)/10 years \$ 11,000 Year 2: (\$120,000 - \$10,000)/10 years 11,000 Year 3: (\$120,000 - \$10,000)/10 years 11,000 Year 4: (\$120,000 - \$10,000)/10 years 11,000 Year 5: (\$120,000 - \$10,000)/10 years 11,000 Year 6: (\$120,000 - \$10,000)/10 years 11,000 Year 7: (\$120,000 - \$10,000)/10 years 11,000 Year 8: (\$120,000 - \$10,000)/10 years 11,000 Year 9: (\$120,000 - \$10,000)/10 years 11,000 Year 10: (\$120,000 - \$10,000)/10 years 11,000 \$ 110,000 2. Double-decline-balance method. DDB SL DDB & SL Year 1: \$120,000 x 1/10 x 2 \$ 24,000 \$ 11,000 \$ 24,000 Year 2: (\$120,000 - \$24,000) x 1/10 x 2 19,200 9,556 19,200 Year 3: (\$120,000 - \$43,200) x 1/10 x 2 15,360 8,350 15,360 Year 4: (\$120,000 - \$58,560) x 1/10 x 2 12,288 7,349 12,288 Year 5: (\$120,000 - \$70,848) x 1/10 x 2 9,830 6,525 9,830 Year 6: (\$120,000 - \$80,678) x 1/10 x 2 7,864 5,864 7,864 Year 7: (\$120,000 - \$88,542) x 1/10 x 2 6,292 5,365 6,292 Year 8: (\$120,000 - \$94,834) x 1/10 x 2 5,033 5,055 5,055 Year 9: (\$120,000 - \$99,867) x 1/10 x 2 4,027 5,055 Year 10: (\$120,000 - \$103,894) x 1/10 x 2 3,221 5,056 \$ 107,115 \$ 110,000 SL depreciation = (Beginning of year book value - \$10,000)/Remaining life — Year 8 is the first year that S-L depreciation is higher than DDB depreciation.
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