Q35PGA - Horngren'S Financial And Managerial Accounting

Question

Journalizing partial-year depreciation and asset disposals and exchanges.

 During 2018, Mora Corporation completed the following transactions:

 Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of \)127,000 and accumulated depreciation of \(72,000) for new equipment. Mora also paid \)70,000 in cash. Fair value of new equipment is \(133,000. Assume the exchange had commercial substance.

 Apr. 1 Sold equipment that cost \)18,000 (accumulated depreciation of \(8,000 through December 31 of the preceding year). Mora received \)6,100 cash from the sale of the equipment. Depreciation is computed on a straightline basis. The equipment has a five-year useful life and a residual value of \(0. Dec. 31 Recorded depreciation as follows:

 Office equipment is depreciated using the double-declining-balance method over four years with a \)9,000 residual value.

Record the transactions in the journal of Mora Corporation.

Step-by-Step Solution

Answer

Depreciation expenses calculated by double-declining methods are 

1^st year = $ 66500

2^nd year= $ 33250

3^rd year = $ 16625

4^th year= $ 8312

Step 1: Meaning of Depreciation

Depreciation refers to an expense charged to a business entity's income statement due to the decrease in the value of assets.

Step 2: Recording journal entries

Date	Accounts & Explanation	Debit($)	Credit ($)
Jan 1st	New Equipment	133,000
	Accumulated Depreciation-Equipment	72,000
	Old Equipment		127,000
	Cash		70,000
	Gain on Disposal		8,000
	(To exchange old equipment for new one)
Dec 31	Cash	6,100
	Accumulated Depreciation – Equipment	8,900
	Loss on Disposal	3,000
	Equipment		18,000
	(To sold equipment for cash)

 

Working note: 

1. Calculation of gain or loss on Equipment exchange 

Particulars	Amount ($)	Amount ($)
Equipment book value		$133,000
Less:
Book Value of Asset exchange	$55,000
Cash paid	70,000	125,000
Gain		$8000

2. Calculation of Depreciation for 3 months from 1 Jan 2018 to 1 April 2018 

$\begin{array}{rcl}Depreciationfor3months& =& \frac{Cost-Residual value}{Useful life}\times \frac{3}{12}\\ & =& \frac{\$18,000-0}{5}\times \frac{3}{12}\\ & =& \$900\\ & & \end{array}$

  3. Office equipment depreciation:  

Year	Opening value/Depreciable base	Depreciation rate	Depreciation expenses	Accumulated depreciation	Ending value
1	$133,000	50%	$66,500	$66,500	$66,500
2	$66,500	50%	$33,250	$99,750	$33,250
3	$33,250	50%	$16,625	$116,375	$16,625
4	$16,625	50%	$8,312	$124,687	$8,312

 

Calculation of depreciation rate:

$\begin{array}{rcl}Depreciationrate& =& \frac{100\%}{Usefullife}\times 2\\ & =& \frac{100\%}{4}\times 2\\ & =& 50\%\\ & & \end{array}$