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Chapter 9: 22E (page 488)

Recording partial-year depreciation and sale of an asset On January 2, 2017, Comfy Clothing Consignments purchased showroom fixtures for \(17,000 cash, expecting the fixtures to remain in service for five years. Comfy has depreciated the fixtures on a double-declining-balance basis, with zero residual value. On October 31, 2018, Comfy sold the fixtures for \)7,600 cash. Record both depreciation expense for 2018 and sale of the fixtures on October 31, 2018.

Short Answer

Expert verified

A business entity will generate a gain of $800 on the furniture sale.

Step by step solution

01

Definition of Depreciation

A company charged the expenses to report the decline in the value of the fixed assets acquired by the company is known as depreciation expenses.

02

Recording journal entries

Date

Accounts and Explanation

Debit $

Credit $

31 Oct 2018

Depreciation expenses

$3,400

Accumulated depreciation

$3,400

31 Oct 2018

Cash

$7,600

Accumulated depreciation

$10,200

Gain on sale

$800

Furniture and fixture

$17,000

03

Recording journal entries

Working note:

Depreciationrate=100%Usefullife脳2=100%5脳2=40%

Year

Depreciation base

X

Depreciation rate

=

Depreciation expenses

2017

$17,000

X

40%

=

$6,800

2018

$10,200

X

40%

=

$3,400

Total

=

$10,200

Note: Depreciation for year 2018 is calculated for 10 months. Therefore, it is multiplied by (10/12)

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Most popular questions from this chapter

Accounting for goodwill

Decca Publishing paid \(230,000 to acquire Thrifty Nickel, a weekly advertising paper. At the time of the acquisition, Thrifty Nickel鈥檚 balance sheet reported total assets of \)130,000 and liabilities of \(70,000. The fair market value of Thrifty Nickel鈥檚 assets was \)100,000. The fair market value of Thrifty Nickel鈥檚 liabilities was $70,000.

Requirements

  1. How much goodwill did Decca Publishing purchase as part of the acquisition of Thrifty Nickel?
  2. Journalize Decca Publishing鈥檚 acquisition of Thrifty Nickel

Western Bank & Trust purchased land and a building for the lump sum of $3,000,000. To get the maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to the land. A more realistic allocation would have been 70% to the building and 30% to the land.

Requirements

1. Explain the tax advantage of allocating too much to the building and too little to the land.

2. Was Western鈥檚 allocation ethical? If so, state why. If not, why not? Identify who was harmed.

A Recording lump-sum asset purchases, depreciation, and disposals Ellie Johnson Associates surveys American eating habits. The company鈥檚 accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each depreciable asset. During 2018, Ellie Johnson Associates completed the following transactions:

Jan. 1 Purchased office equipment, \(113,000. Paid \)80,000 cash and financed the remainder with a note payable.

Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(310,000 paid in cash. An independent appraisal valued the land at \)244,125 and the communication equipment at \(81,375.

Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Ellie Johnson Associates received \)420,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.

Dec. 31 Recorded depreciation as follows:

Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value.

Office equipment is depreciated using the double-declining-balance method over five years with a \)1,000 residual value.

Record the transactions in the journal of Ellie Johnson Associate

What is the depreciation method that is used for tax accounting purposes? How is it different than the methods that are required by GAAP to be used for financial accounting purposes?

Calculating partial-year depreciation

On February 28, 2017, Rural Tech Support purchased a copy machine for \(53,400. Rural Tech Support expects the machine to last for six years and have a residual value of \)3,000. Compute depreciation expense on the machine for the year ended December 31, 2017, using the straight-line method.
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