A machine costing $75,000 is purchased on September 1,Year 1.The machine is estimated to have a salvage value of $10,000 and an estimated useful life of 4 years.Double-declining-balance depreciation is used.If the machine is sold on December 31,Year 3 for $13,000,the journal entry to record the sale will include:
A)A credit to gain on sale for $8,000.
B)A debit to loss on sale for $2,625.
C)A credit to accumulated depreciation for $59,375.
D)A debit to loss on sale for $3,042.
E)A credit to gain on sale for $4,979.

Question

Quizplus · Accepted Answer

To find the amount of depreciation each year, we use the double-declining-balance formula, which is:

(2 x straight-line rate) x (cost - accumulated depreciation)

The straight-line rate is 1/4 (since the estimated useful life is 4 years).

So the depreciation expense for Year 1 is:

(2 x 1/4) x ($75,000 - $0) = $37,500

The depreciation expense for Year 2 is:

(2 x 1/4) x ($75,000 - $37,500) = $22,500

The depreciation expense for Year 3 is:

(2 x 1/4) x ($75,000 - $60,000) = $7,500

*Note: For Year 3, we calculate the depreciation on the net book value at the beginning of the year, which is the cost ($75,000) minus the accumulated depreciation at the end of Year 2 ($60,000).

So, the total accumulated depreciation at the end of Year 3 is:

$37,500 + $22,500 + $7,500 = $67,500

The net book value (NBV) of the machine at the end of Year 3 is:

Cost - accumulated depreciation = $75,000 - $67,500 = $7,500

If the machine is sold for $13,000, there will be a gain on sale of:

Sale price - NBV = $13,000 - $7,500 = $5,500

The journal entry to record the sale will be:

Debit: Cash $13,000 
Debit: Loss on sale $2,625 
Credit: Accumulated depreciation $67,500 
Credit: Machine $75,000 
Credit: Gain on sale $5,500

The loss on sale is calculated as follows:

$75,000 (cost) - $67,500 (accumulated depreciation) - $13,000 (sale price) = -$2,500 (which is why we debit "Loss on sale" for $2,625).

A Machine Costing $75,000 Is Purchased on September 1,Year 1