Question

(Depreciation—SYD, Act., SL, and DDB) The following data relate to the Machinery account of Eshkol, Inc. at December 31, 2017.

Machinery
	A	B	C	D
Original cost	\(46,000	\)51,000	\(80,000	\)80,000
Year purchased	2012	2013	2014	2016
Useful life	10 years	15,000 hours	15 years	10 years
Salvage value	\( 3,100	\) 3,000	\( 5,000	\) 5,000
Depreciation method	Sum-of-the year digits	Activity	Straight-line	Double-declining balance
Accum. depr. through 2017	\(31,200	\)35,200	\(15,000	\)16,000

*In the year an asset is purchased, Eshkol, Inc. does not record any depreciation expense on the asset. In the year an asset is retired or traded in, Eshkol, Inc. takes a full year’s depreciation on the asset.

The following transactions occurred during 2018.

1. On May 5, Machine A was sold for \(13,000 cash. The company’s bookkeeper recorded this retirement in the following manner in the cash receipts journal.

Cash 13,000

Machinery (Machine A) 13,000

b. On December 31, it was determined that Machine B had been used 2,100 hours during 2018.

c. On December 31, before computing depreciation expense on Machine C, the management of Eshkol, Inc. decided the useful life remaining from January 1, 2018, was 10 years.

d. On December 31, it was discovered that a machine purchased in 2017 had been expensed completely in that year. This machine cost \)28,000 and has a useful life of 10 years and no salvage value. Management has decided to use the double-declining-balance method for this machine, which can be referred to as “Machine E.”

Instructions

Prepare the necessary correcting entries for the year 2018. Record the appropriate depreciation expense on the above-mentioned machines. No entry is necessary for Machine D.

Short answer

1. Accumulated depreciation = $3,900
2. Accumulated depreciation = $6,720
3. Accumulated depreciation = $6,000
4. Accumulated depreciation = $5,600

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Depreciation

Depreciation refers to the expense incurred on assets like plant and machinery, building and motor vehicles, etc., due to excess use or when the asset becomes obsolete. Except for land, all the assets depreciate with time.

(a) Preparing journal entries.

Date	Particular	Debit ($)	Credit ($)
May 5, 2018	Depreciation Expense	3,900
	Accumulated Depreciation Machinery (A)		3,900
May 5, 2018	Accumulated Depreciation-Machinery (A)	35,100
	Machinery (A)		33,000
	Gain on Disposal of Machinery		2,100

Working notes:

Calculating the amount of accumulated depreciation

$$\begin{gathered} \text{Accumulated\hspace{0.17em}depreciation}=(\text{Cost\hspace{0.17em}of\hspace{0.17em}asset}-\text{Salvage\hspace{0.17em}value})\times \frac{\text{Total\hspace{0.17em}year}}{\text{Sum\hspace{0.17em}of\hspace{0.17em}the\hspace{0.17em}year\hspace{0.17em}digit}} \\ =(\mathrm{\$}46,000-\mathrm{\$}3,100)\times \frac{5}{55} \\ =\mathrm{\$}42,900\times \frac{5}{55} \\ =\mathrm{\$}3,900 \end{gathered}$$

Calculating the sum of year digit

$\begin{array}{c}\text{Sum\hspace{0.17em}of\hspace{0.17em}year\hspace{0.17em}digit}=\frac{\text{n}(\text{n}+1)}{2}\\ =\frac{10(10+1)}{2}\\ =55\end{array}$

Calculation of gain on a disposable machine

$$\begin{gathered} \text{Gain\hspace{0.17em}on\hspace{0.17em}disposable\hspace{0.17em}machine}=\text{Accumulated\hspace{0.17em}depreciation+Depreciation\hspace{0.17em}expense}-\text{Machinery\hspace{0.17em}A} \\ =\mathrm{\$}31,200+\mathrm{\$}3,900-\mathrm{\$}33,000 \\ =\mathrm{\$}2,100 \end{gathered}$$

(b) Preparing journal entries.

Date	Particular	Debit ($)	Credit ($)
Dec. 31, 2018	Depreciation Expense	6,720
	Accumulated Depreciation Machinery (B)		6,720

Working notes:

Calculating accumulated depreciation

$$\begin{gathered} \text{Accumulated\hspace{0.17em}depreciation}=\left(\frac{\text{Cost\hspace{0.17em}of\hspace{0.17em}asset}-\text{Salvage\hspace{0.17em}value}}{\text{Useful\hspace{0.17em}life}}\right)\times \text{Toatl\hspace{0.17em}hours\hspace{0.17em}used} \\ =\left(\frac{\mathrm{\$}51,000-\mathrm{\$}3,000}{15,000}\right)\times 21,000 \\ =3.2\times 21,000 \\ =\mathrm{\$}6,720 \end{gathered}$$

(c) Preparing journal entries.

Date	Particular	Debit ($)	Credit ($)
Dec. 31, 2018	Depreciation Expense	6,000
	Accumulated Depreciation Machinery (C)		6,000

Working notes:

Calculating Accumulated depreciation

$$\begin{gathered} \text{Accumulated\hspace{0.17em}depreciation}=\frac{\text{Cost\hspace{0.17em}of\hspace{0.17em}asset}-\text{Salvage\hspace{0.17em}value}-\text{Depreciation\hspace{0.17em}through\hspace{0.17em}}2017}{\text{Useful\hspace{0.17em}life\hspace{0.17em}remaining}} \\ =\frac{\mathrm{\$}80,000-\mathrm{\$}15,000-\mathrm{\$}5,000}{10} \\ =\frac{\mathrm{\$}60,000}{10} \\ =\mathrm{\$}6,000 \end{gathered}$$

(d) Preparing journal entries.

Date	Particular	Debit ($)	Credit ($)
Dec. 31, 2018	Machinery (E)	28,000
	Retained Earnings		28,000
	Depreciation Expense $(\mathrm{\$}28,000\times .020)$	5,600
	Accumulated Depreciation Machinery (E)		5,600