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Q14E

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 587

Short Answer

(Error Analysis and Depreciation, SL and SYD) Mike Devereaux Company shows the following entries in its Equipment account for 2018. All amounts are based on historical cost.

Equipment
20182018
Jan 1Balance 134,750June 30Cost of 23,000 equipment sold (purchased prior to 2018)
Aug. 10Purchases 32,000
12Freight on Equipment purchased 700
25Installation costs 2,700
Nov. 10Repairs 500

Instructions

  1. Prepare any correcting entries necessary.
  2. Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 2018 under each of the methods listed below. Assume an estimated life of 10 years, with no salvage value. The machinery included in the January 1, 2018, balance was purchased in 2016. a. Straight-lineb. Sum-of-the-years’-digits.

Answer

a) Maintenance and repairs expense = 500

b 1) Depreciation = $14,715

b 2) Depreciation = $22,691

See the step by step solution

Step by Step Solution

Step 1: Meaning of Straight-Line Depreciation

Straight-line depreciation is the simplest way to assess depreciation over time. By allocating identical amounts to the asset's accounting periods over its useful life, it makes the asset's expense predictable along with smoothing net income.

Step 2: (a) Preparing journal entries 

Date

Particular

Debit ($)

Credit ($)

Maintenance and Repairs Expense

500

Equipment

500

Step 3: (b 1) Computing depreciation using the straight-line method

The proper ending balance in the asset account is:

January 1 balance

$134,750

Add New equipment:

Purchases $32,000

Freight 700

Installation 2,700

35,400

Less: Cost of equipment sold

23,000

December 31 balance

$147,150

Depreciation under straight line

Step 4: (b 2) Computing depreciation using the Sum-of-the-years’-digits method 

Calculating sum-of-years digits

Determining depreciation in 2018

For equipment purchased in 2016: $111,750 ($134,750-$23,000) of the cost of equipment purchased in 2016 is still on hand is

$16,255

For equipment purchased in 2018: 10/55 X $35,400

6,436

Total

$22,691

Working Notes:

Determining equipment cost

For equipment purchased in 2016: $111,750 of the cost of equipment purchased in 2016 is still on hand is

$16,255

For equipment purchased in 2018: 10/55 X $35,400

6,436

Total

$22,691

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