Question

Part 1: On October 1, 2014 The Han Solo Company purchased 4 assets as descrived below

Millenium Falcon cost $1,950,000, Life 14 years, $90,000 salvage

Jedi Sword cost $280,000, Life 9 years, salvage $10,000 Speeder cost $150,000, Life 12 years, salvage $22,000

Death Star cost $1,500,000, Life 30 years, Salvage $90,000, Mileage 2,000,000 miles

Vader elects to depreciate the Millenium Falcon using straight-line; the Jedi sword using double declining balance, the speeder using sum of year’s digits, and the Death Star using units of activity: in 2014 Han Solo drove the Death Star 125,000 miles, in 2015 Han Solo rove the Death Star 350,000 miles Determine depreciation expense and book value for each of the 4 assets on December 31, 2014 and 2015

Part 2 Using the information from part 1: In July 2014 Han Solo chose to use group/composite depreciation for the Falcon, the Jedi sword and the speeder. On January 1, 2015 Han Solo purchased a C3P0 unit for $900,000 which will belong in the group/composite Determine depreciation expense for 2015 for the group of assets (you can ignore the Death Star for part 2)

Part 3 Ignore part 2 when doing part 3: Going back to part 1: On January 1,2016 Han Solo spent $317,000 adding a hyper-drive to the Millenium Falcon. With this hyper-drive the Falcon will now last a total of 19 years instead of the original 14 years. Make a journal entry for when Solo installs the hyper-drive and determine 2016 depreciation expense for the Millenium Falcon.

Part 4 Ignore parts 2 and 3 when doing part 4: Go back to part 1: On January 1, 2016 the Jedi sword was stolen by The First Order. The insurance company gave Solo $55,000 for his stolen sword. Make the journal entry on January 1, 2016 when the sword is stolen, and the Insurance company gives Solo the $55,000 (one journal entry incorporating both events is acceptable and preferred since the insurance company settles claims quickly)

Answer 1

Part-1

Part 3

Journal Entry for installing the hyper-drive to Millenium Falcon

Millenium Falcon A/c Dr. $317,000

To Bank/Cash A/c $317,000

When there is a change in the useful life of the asset, then the remaining book value of the asset should be depreciated over the remaining useful life of the asset.

So, Depreciation on Millenium Falcon for 2016

= (Remaning bookvalue - Salvage Value)/Remaining Usefu Life

= ($1,684,286 + $ 317,000- $90,000)/17

= $ 112,429