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CHAPTER 11
SIMULATION – 6 A
A machine cost $800,000 on April 1, 2014. Its estimated salvage value is $80,000 and its expected life is eight years. Instructions Calculate the depreciation expense (to the nearest dollar) by each of the following methods: . Straight-line for 2014 Double-declining balance for 2015 Sum-of-the-years'-digits for 2015 Which method would result in the smallest income amount for 2015? SOLUTION SIMULATION – 6 A: . a) Straight-line for 2014. ($800,000 - $80,000) / 8y = $90, $90,000 * 9/12 = $67, b) Double-declining balance for 2015 90,000/720,000 = 0.1252=0. 2014: 800,0000.259/12=150, 800,000-150,000=650, 2015: 650,0000.25= $162, c) Sum-of-the-years'-digits for 2015 1+2+3+4+5+6+7+8= 2014: 720,000 8/36 1/4 = 40, 2015: 720,0007/363/4 = 105, $ 145, Double-declining balance method would result in the smallest income amount for 2015.
SIMULATION - 6 B
Dolphin Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2013 for $8,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2014, new technology was introduced that would accelerate the obsolescence of Dolphin’s equipment. Dolphin’s controller estimates that expected future net cash flows on the equipment will be $5,000,000 and that the fair value of the equipment is $4,400,000. Dolphin intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Dolphin uses straight-line depreciation. Instructions a) What is the carrying value of the asset? b) Prepare the journal entry (if any) to record the impairment at December 31, 2014. c) Prepare any journal entries for the equipment at December 31, 2015. The fair value of the equipment at December 31, 2015, is estimated to be $4,600,000. d) Repeat the requirements for (b) and (c), assuming that Dolphin intends to dispose of the equipment and that it has not been disposed of as of December 31, 2015. SOLUTION SIMULATION – 6 B: a) 8,000,000 ÷ 8 *2 = 2,000,000 (depreciation for first two years) 8,000,000 – 2,000,000 = 6,000, Carrying value of the asset = $6,000, b) Impairment entry at December 31, 2014: 6,000,000 – 4,400,000=1,600, Loss on Impairment 1,600, Accumulated Depreciation 1,600, c) 4,400,000 ÷ 4y = 1,100, Depreciation Expense 1,100, Accumulated Depreciation 1,100,
