Chapter 9: Q38PGB_1 (page 536)

Whitney Plumb Associates surveys American eating habits. The company’s accounts include Land, Buildings, Office Equipment, and Communication Equipment, witha separate Accumulated Depreciation account for each asset. During 2018, WhitneyPlumb completed the following transactions:
Jan. 1 Purchased office equipment, $117,000. Paid $77,000 cash and financedthe remainder with a note payable.
Apr. 1 Acquired land and communication equipment in a lump-sumpurchase. Total cost was $350,000 paid in cash. An independentappraisal valued the land at $275,625 and the communication equipmentat $91,875.
Sep. 1 Sold a building that cost $520,000 (accumulated depreciation of $285,000through December 31 of the preceding year). Whitney Plumb received$390,000 cash from the sale of the building. Depreciation is computed ona straight-line basis. The building has a 40-year useful life and a residualvalue of $25,000.
Dec. 31 Recorded depreciation as follows:
Communication equipment is depreciated by the straight-line methodover a five-year life with zero residual value.Office equipment is depreciated using the double-declining-balancemethod over five years with a $2,000 residual value.
Record the transactions in the journal of Whitney Plumb Associates.

Expert verified

Accumulated depreciation on communication equipment is $13,125

Accumulated depreciation on office equipment is $46,800

Step by step solution

Depreciation refers to expenses charged by a business entity due to the declining value of the assets.

Date	Particulars	Debit ($)	Credit ($)
Jan 1	Office Equipment	117,000
	Cash		77,000
	Notes Payable		40,000
	(To office equipment purchased partially with cash and partially on credit)

Apr 1	Land (refer working note 1)	262,500
	Communication Equipment	87,500
	Cash		350,000
	(To assets purchased on lump sum basis)

Sep 1	Cash	390,000
	Accumulated Depreciation – Building	293,250
	Building		520,000
	Gain on disposal		163,250
	(To building sold for gain)

Dec 31	Depreciation Expense– Comm. equipment	13,125
	Accumulated Depreciation – Comm. equipment		13,125
	(To depreciation charged on equipment)

Dec 31	Depreciation Expense– Office equipment	46,800
	Accumulated Depreciation – Office equipment		46,800
	(To depreciation charged on office equipment)

Working note:

Calculation of amount of Land and equipment purchased on lump sum $\begin{matrix} L a n d C o s t = L u m s u m C o s t \times \frac{A p p r a i s a l v a l u e f o r l a n d}{T o t a l a p p r a i s a l v a l u e f o r l a n d a n d b u i l d i n g} \\ = $ 350, 000 \times \frac{$ 275, 625}{$ 275, 625 + $ 91, 875} \\ = $ 350, 000 \times 0.75 \\ = $ 262, 500 \end{matrix}$ $\begin{matrix} B u i l d i n g C o s t = T o t a l l u m p s u m v a l u e - L a n d c o s t \\ = $ 350, 000 - $ 262, 500 \\ = $ 87, 500 \end{matrix}$
Calculation of Partial Depreciation on Building
$\begin{matrix} P a r t i a l D e p r e c i a t i o n f o r 2018 = \frac{C o s t - R e s i d u a l v a l u e}{U s e f u l L i f e} \times \frac{N o . o f m o n t h s i n u s e}{12} \\ = \frac{$ 520, 000 - $ 25, 000}{40} \times \frac{8}{12} \\ = $ 12, 375 \times \frac{8}{12} \\ = $ 8, 250 \end{matrix}$
Calculation of Depreciation on Computer equipment
$\begin{matrix} D e p r e c i a t i o n o n C o m p u t e r E q u i p m e n t = \frac{C o s t - R e s i d u a l v a l u e}{U s e f u l L i f e} \times \frac{N o . o f m o n t h s i n u s e}{12} \\ = \frac{$ 87, 500 - $ 0}{5} \times \frac{9}{12} \\ = $ 17, 500 \times \frac{9}{12} \\ = $ 13, 125 \end{matrix}$

Calculation of depreciation on office equipment

Year	Opening value/ Depreciable base	Depreciation rate	Depreciation expenses	Accumulated depreciation	Ending value
1	$117,000	40%	$46,800	$46,800	$70,200
2	$70,200	40%	$280,80	$74,880	$42,120
3	$42,120	40%	$16,848	$91,728	$25,272
4	$25,272	40%	$10,108.8	$101,833.8	$15,163.2
5	$15,163.2	40%	$6,065.28	$107,899.08	$9,097.92

\begin{matrix} D e p r e c i a t i o n r a t e = \frac{100 %}{U s e f u l l i f e} \\ = \frac{100 %}{5} \times 2 \\ = 40 % \end{matrix}

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Asset	Acquisition Date	Cost	Estimated Life	Estimated Residual value	Depreciation Method	Monthly Depreciation Expense
Canoes	Nov. 3, 2018	\(4,800	4 Years	\) 0	SL	$100
Land	Dec 1, 2018	85,000			n/a
Building	Dec 1, 2018	35,000	5 Years	5,000	SL	500
Canoes	Dec 2, 2018	7,200	4 Years	0	SL	150
Computer	Mar. 2, 2019	3,600	3 Years	300	DDB
Office Furniture	MAR. 3, 2019	3,000	5 Years	600	SL