Chapter 8 Activity

Part A:
The cost of a piece of equipment is $162,000; it has a 5-year life, and an estimated salvage
value of $2,000.

1. What is the amount of depreciation for the first full year if the company adopts the
straight-line method?

162,000 – 2,000 = 160,000/5 = $32,000/year

2. What is the book value of the equipment after it has been owned for 1 full year. (hint
use part 1)?

Cost – A/D = Book Value

162,000 – 32,000 = $130,000

3. What is the amount of depreciation for the first year if the company did not purchase
the equipment until July 1st and adopts the Straight-line method?

1yr Depr. XP * fraction of year

32,000 * 6/12 = $16,000

4. What is the net book value of the equipment after it has been owned for 1 5/12 years?

Step 1: 32,000 * 17/12 = 45,333

Step 2: 162,000 – 45,333 = $116,667

Part B:
On 1/1/2020, Jabari, Inc. purchases a truck costing $30,000 with an expected useful life of 4
years or 120,000 miles and an expected residual value of $14,000 (after the 4 years or the
120,000 miles).

 What is the depreciation expense for the truck during the year ended 12/31/2021
assuming Jabari uses the Double-declining Balance Method?

Begin BV 2 / Est. Depreciatio Acc. End BV

Life n Deprec.
2020 30,000 x 2/4 15,000 15,000 15,000
2021 15,000 x 2/4 7,500 22,500 7,500
2021 1,000 16,000 14,000
(adjusted)

 What is the net book value of the truck as of 1/1/2023 if Jabari uses the Units-of-
Production method for depreciation and drives the truck 45,000 miles during 2020;
25,000 miles during 2021; and 20,000 miles during 2022?

Cost – Salvage Value = 30,000 – 14,000 = .1333

Tot. Units of Production 120,000

2020 Depreciation = .1333 * 45,000 = 6,000

2021 Depreciation = .1333 * 25,000 = 3,333
2022 Depreciation = .1333 * 20,000 = 2,667
Accumulated Depreciation = 12,000

NBV = 30,000 – 12,000 = 18,000

 Assume Jabari uses straight-line depreciation and sells the truck on 12/31/2021 for
$20,500. What journal entry should Jabari record for the sale?

Cost – Salvage Value = 30,000 – 14,000 = 4,000

Total Life (years) 4

Accumulated Depreciation = 4,000 * 2 = 8,000

Journal Entry:
Cash 20,500
Accumulated Depreciation 8,000
Loss on Asset Disposal 1,500
Truck 30,000
Part C:
If a company sells a piece of old equipment for $14,000 cash on July 1, 2020. The
equipment had an original cost of $50,000, a useful life of 10 years, and a balance in the
accumulated depreciation account of $41,000 as of January 1 st, 2020. What is the amount of
the gain or loss on the sale? (Hint: calculate depreciation first and then calculate gain/loss)

The gain / loss is $ $ 7,500

(Circle one)

Prepare the journal entries to record depreciation at 7/1/2020 and the sale of this equipment.
DATE ACCOUNT TITLE AND EXPLANATION DEBIT CREDIT
07/20 Depreciation Expense 2,500
Accumulated Depreciation 2,500

07/20 A/D Equipment 43,500

Cash 14,000
Equipment 50,000
Gain on Sale of Assets 7,500

Part D:
1. The company purchased a piece of equipment for $162,000 on January 1, 2020. The
company determined that it has a 5-year life, and an estimated salvage value of $2,000.
If the company uses the straight-line method for depreciation, what is the book value at
December 31, 2020?
a. $160,000
b. $130,000
c. $128,000
d. $32,000

2. The company purchased a piece of equipment for $162,000 on April 1, 2020. The
company determined that it has a 5 year life, and an estimated salvage value of $2,000.
If the company uses the straight-line method for depreciation, what is the depreciation
expense for the year ended December 31, 2020?
a. $32,400
b. $32,000
c. $24,000
d. $21,333
Part E:
Clement Inc. buys equipment for use in its operations. On 3/1/20, Clement Inc. purchased a
piece of machinery for $15,000 cash. Transporting the equipment to the work site cost $600
and installation costs amounted to $400. As well, an annual insurance policy on the machine
was purchased for $240 cash. The machine has an estimated life of 7 years with a salvage
value of $2000. Clement has a strict policy against the resale of any machinery if it is for a
loss greater than $500. Equip. 15,000
Transport 600
Make the Journal Entry to record all transactions on 3/1/20 : Install 400
DATE ACCOUNT TITLE AND EXPLANATION DEBIT CREDIT Total Cost 16,000
03/01 Equipment 16,000
Prepaid Insurance - Equipment 240

Cash 16,240

Record depreciation expense at 12/31/20 :

DATE ACCOUNT TITLE AND EXPLANATION DEBIT CREDIT
12/31 Depreciation Expense 1,667
A/D - Equipment 1,667 16,000-2,000 * 10/12

On 9/1/21, an outside buyer offered to buy the equipment from Clement Inc for $9000 cash.
Would Clement Inc. sell the equipment?

Holding period = 1.5 years

Annual Depr = (16,000 -2,000)/7 = 2,000
Book Value @ 09/01/21 = 16,000 – 3,000 = 13,000
Gain/(Loss) from Sale = 9,000 – 13,000 = (4,000) – LOSS DO NOT SELL

On 12/31/22, the buyer made another offer to purchase the equipment for $10,300 cash.
Calculate the gain or loss and then show the journal entry to sell the equipment.
DATE ACCOUNT TITLE AND EXPLANATION DEBIT CREDIT
12/31 Cash 10,300
A/D – Equipment 5,667
Loss On Sale of Equipment 33

Equipment 16,000

What’s the impact of this transaction on financial statements?

Assets: (increase/decrease/no change)

Net income: (increases/decreases/no change)
Equity: (increases/decreases/no change)
Liabilities: (increase/decreases/no change)