Question

Sofie’s Soda Co purchased a soda drink machine on January 1^st, 2016 for $600,000. The company provided the following additional information:

1. Expected useful life is 10 years or 100,000 drinks.
2. In 2016, 6,000 drinks were sold.
3. In 2017, 16,000 drinks were sold.
4. Residual value $20,000.
5. In 2018, 12,000 bottles were sold.

The company also provided the following information using three (3) deprecation methods at the end of 2016 and 2017:

	Method A
Year	Annual Depreciation Expense	Accumulated Depreciation
2016	$          34,800	$          34,800
2017	$          92,800	$        127,600
	Method B
Year	Annual Depreciation Expense	Accumulated Depreciation
2016	$      58,000.0	$        58,000.0
2017	$      58,000.0	$      116,000.0
	Method C
Year	Annual Depreciation Expense	Accumulated Depreciation
2016	$         120,000	$        120,000
2017	$           96,000	$        216,000

Requirements:

1. Identify the depreciation method used in each instance above and show the equation and computation for each method which should tie to the figures reported in the above table.
2. Compute the depreciation expense for 2018, accumulated depreciation and net book value as at 2018 using the three methods above. (Round off answer to the nearest dollar were appropriate and show all workings).
3. Assuming the company adopted the double declining balance method and sold the drink machine for $60,000 on September 1st, 2018, prepare the journal entries to record the disposal of the fixed asset as at that date. (Round off answer to the nearest dollar were appropriate).

Answer 1

The above Question completely based on Multiple base to calculate depreciation .

Normally following method we used in relates to Depreciation - 1) Straight Line basis 2) Unit of Production 3) Sum of year digits and Double declining balance

Little explanation on above 4 Method :

Straight Line Method - Estimated Salvage value of the asset and deduct from Original Cost . The difference amount must be expense. This method is quite straightforward

Unit of Production Method - we used following formula :

Historical Cost ( Original cost of the asset , when it was purchased ) Salvage value . After that determine expenses for the accounting period and multiply by Number of Units produced .

Sum of the year digit depreciation lies between Straight Line and Double declining balances method .

Double Declining Balance - Short form DDB .As per USGAAP , This method represents higher depreciation expenses near the start of the asset and lower depreciation later on .

Method A - Depreciation calculated on the basis of Unit Of Production Method :

Method A
Year	Annual Depreciation Expenses($)	Accumulated Depreciation($)
2016	34,800	34,800
2017	92,800	1,27,600

Complete calculation as below

Depreciation method used - Unit Of Production method
Calculation
Year 2016
Machinery Purchased( $)	6,00,000
Residual Value	20,000
After residual value Adjustment	5,80,000
Number of Drinks	1,00,000
Depreciation per Drinks	6	Accumulated Depreciation($)
Year 2016
In 2016 ( Sold) drink	6,000
Annual Depreciation Expenses	34,800	34,800
Year 2017
In 2017 ( Sold) drink	16,000
Depreciation per Drinks	6
Annual Depreciation Expenses -2017	92,800	1,27,600
		(Accumulated depreciation in 2017 Accumulated Depreciation of 2016 Yr + Depreciation Expenses -Yr 2017

Note - Depreciation Per drink = (Original Value - Salvage value )/ Number of Drinks ( here Drink is UNIT )

2016 - Depreciation Expenses -Number of Units sold * Depreciation rate per drink ( as calculated above )

2017 - Depreciation Expenses -Number of Units sold * Depreciation rate per drink ( as calculated above )

Accumulated depreciation on 2017 = Accumulated depreciation of 2016 + Current Year ( 2017) depreciation Expenses .

Method B
Year	Annual Depreciation Expenses($)	Accumulated Depreciation($)
2016	58,000	58,000
2017	58,000	1,16,000

We sued Straight Line depreciation method here :

Detail calculation as below :

Depreciation method used - Straight Line method
Calculation
Year 2016
Machinery Purchased( $)	6,00,000
Residual Value	20,000
After resudual value Adjustment	5,80,000
Expected Useful life	10
Depreciation	58,000	Accumulated Depreciation($)
Year 2016	58,000	58,000
Year 2017	58,000	1,16,000

Very straight  forward calculation as mentioned above along witj Accumulated depreciation ( same concept as mentioned above ) -Accumulated depreciation on 2017 = Accumulated depreciation of 2016 + Current Year ( 2017) depreciation Expenses

Method C
Year	Annual Depreciation Expenses($)	Accumulated Depreciation($)
2016	1,20,000	1,20,000
2017	96,000	2,16,000

Here we used Double declining Balance Depreciation method .

Calculation as below - Step wise

Formula use	Book Value * Double the rate of Straight Line Method
Straight Line rate		10%	( '1/Expected useful life)
Double the Straight Line rate		20%	( 2*10%)
			Depreciation Expenses
	Book Value ($)	Double rate of Straight Line Method	Depreciation($)
Year 2016	6,00,000	20%	1,20,000
Year 2017	4,80,000	20%	96,000
	( Year 2017 Book Value = Original Book value - Depreciation of 2016)

Last Answer :

In the year 2018 , sale proceeds under double declining balance method - Sale Value $ 60,000

Book Value as per below calculation :

Year	Orginal Value	Double digit	Annual Depreciation Expenses($)	Closing Book Value ($)
2016	6,00,000	20%	1,20,000	4,80,000
2017	4,80,000	20%	96,000	3,84,000
2018	3,84,000	20%	76,800	3,07,200

Journal Entries :

Cash A/c Debit ==== $60,000

Loss on sale of machinery A/c - Debit == $ 247,200

Machinery A/c Credit ========== $ 3,07,200 ( closing Book value at the time of Sale )

Accumulated depreciation - Year 2016 - $120,000 and Year 2017 = Year 2016 + Current Year Depreciation = $ 216000

Answer -2 :

Method A - Depreciation Expenses YR 2018 - Number of Drink 2018 - $ 12000 * rate per drink( $6/drink) =$ 72000

Accumulated depreciation - Year 2018 - Accumulated Depreciation till 2017 - $ 127,600 + Current year Depreciation $ 72000

Total Accumulated Depreciation ( Year 2018 ) = $ 199,600

Method B- Straight Line - Year 2018 - depreciation - $58000 and Accumulated Depreciation - Accumulated Depreciation till 2017 - $ 116000 + Current year Depreciation -$ 58000 = Total Accumulated depreciation - $ 174,000

Method C - Double declining Balance -

Depreciation Expenses - Year 2017 - Original Value 0 Depreciation =  $ 480,000- Depreciation ( 20%) -$ 96,000 = $384,000

year 2018 Depreciation expenses - 20% rate * Closing Books value of 2017 Year ( $ 384000) = $ 76,800

Year 2018 Accumulated depreciation - Accumulated depreciation till 2017 =$ 216,000 +current year depreciation ( year 2018) $76,8000 = Total accumulated depreciation - $ 292,800