Question

Solich Sandwich Shop had the following long-term asset balances as of December 31, 2018:

	Cost	Accumulated Depreciation		Book Value
Land	$ 78,000	?		$ 78,000
Building	443,000	$(84,170	)	358,830
Equipment	198,400	(46,600	)	151,800
Patent	165,000	(66,000	)	99,000

Solich purchased all the assets at the beginning of 2016 (3 years ago). The building is depreciated over a 20-year service life using the double-declining-balance method and estimating no residual value. The equipment is depreciated over a 8-year useful life using the straight-line method with an estimated residual value of $12,000. The patent is estimated to have a five-year service life with no residual value and is amortized using the straight-line method. Depreciation and amortization have been recorded for 2016 and 2017.

1. For the year ended December 31, 2018, record depreciation expense for buildings and equipment. Land is not depreciated. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

2. For the year ended December 31, 2018, record amortization expense for the patent. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

3. Calculate the book value for each of the four long-term assets at December 31, 2018.

New Morning Bakery is in the process of closing its operations. It sold its two-year-old bakery ovens to Great Harvest Bakery for $550,000. The ovens originally cost $745,000, had an estimated service life of 10 years, and an estimated residual value of $45,000. New Morning Bakery uses the straight-line depreciation method for all equipment.

4. Calculate the balance in the accumulated depreciation account at the end of the second year.

5. Calculate the book value of the ovens at the end of the second year.

6. What is the gain or loss on the sale of the ovens at the end of the second year?

7. Record the sale of the ovens at the end of the second year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

  

Answer 1

• All working forms part of the answer
• Requirement 1

	Cost	Salvage Value	Depreciable Base	Life	Year 1	Year 2	Accumulated Depreciation till 31 Dec 2017 [given]	Year 3 [2018]	Book Value at end of 31 Dec, 2018
Land	78000	N/A	78000	N/A	0	0	0	0	78000
Building	443000	Nil	443000	20	44300	39870	84170	35883	322947
Equipment	198400	12000	186400	8	23300	23300	46600	23300	128500
Patent	165000	Nil	165000	5	33000	33000	66000	33000	66000

Journal Entry

Date	General Journal	Debit	Credit
31 Dec 2018 [answer 1]	Depreciation expenses	59183
	Accumulated Depreciation-Building		35883
	Accumulated Depreciation-Equipment		23300
31 Dec 2018 [answer 2]	Amortisation expense	33000
	Accumulated Depreciation-patent		33000

Answer

	Cost	Accumulated Depreciation till 31st Dec 2018	Book Value 31 Dec 2018
Land	$    78,000.00	$                          -	$      78,000.00
Building	$ 4,43,000.00	$    (1,20,053.00)	$ 3,22,947.00
Equipment	$ 1,98,400.00	$        (69,900.00)	$ 1,28,500.00
Patent	$ 1,65,000.00	$        (99,000.00)	$      66,000.00

• Requirement 2

Cost	745000
Salvage Value	45000
Depreciable base	700000
Life	10 years
Annual Depreciation	70000

4. Accumulated Depreciation balance at the end of 2nd year =70000 x 2 = $140,000

Cost	745000
(-) Accumulated Depreciation	140000
5. Book Value at the end of 2nd year	$605000
Book Value at the time of sale	605000
(-) Sold for	550000
6. Loss on Sale	$55000

	Debit	Credit
Cash	$       5,50,000.00
Accumulated Depreciation	$       1,40,000.00
Loss on Sale	$           55,000.00
Equipments		$ 7,45,000.00
(sale of asset at the end of second year)