Problem 2Assume that a company sold a delivery van that had been used in the business for three years.Records of the com...

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Assume that a company sold a delivery van that

April 14, 2018

Problem 2
Assume that a company sold a delivery van that had been used in the business for three years.
Records of the company related to the van reflect the following:
Delivery van cost
Accumulated Depreciation

$42,500
25,200

Required:
1. Prepare the required journal entry to record disposal of the van, assuming the following
sales amounts for cash:
a. $17,300
b. $20,500
c. $15,800
2. Based on the situation above, explain the effects of the disposal of an asset on the
company’s financial statements.

Problem 3
At the beginning of the year, a company bought three new machines for its production facilities.
The machines were all different so each had to be recorded separately. Below are the costs
related to each purchase.
Machine A
14,000
600
600

Amount paid for the machine
Installation cost
Delivery cost

Machine B
28,500
1,000
800

Machine C
11,200
400
600

At the end of the first year, each machine had been operated 5,200 hours
Required:
1. Compute the cost of each machine.
2. Prepare the journal entry to record depreciation expense at the end of year 1, assuming
the following:
Machine

Life

A
B
C

6 years
50,000 hours
5 years

Residual
Value
1,000
2,000
1,000

Depreciation Method
Straight-line
Units-of-production
Double-declining-balance

Problem 4
You are a financial analyst for your company and have been asked to determine the impact of
various depreciation methods on the company’s financial statements. Your analysis is based on a
machine costing $110,000 with an estimated useful life of 12 years and an estimated residual
value of $8,000. The machine also has an estimated useful life in output of 220,000 units. Actual
output was 21,000 units in year 1 and 15,000 units in year 2.
Required:
1. For years 1 and 2, prepare depreciation schedules (round all results to the nearest dollar)
for the asset assuming:
a. Straight-line method
b. Units-of-production method
c. Double-declining-balance method
Year

Computation

Depreciation
Expense

Accumulated
Depreciation

Net Book Value

Straight-line:
Acquisitio
n
Year 1
Year 2
Units-of-production:
Acquisitio
n
Year 1
Year 2
Double-declining-balance:
Acquisitio
n
Year 1
Year 2
2. Evaluate each method in terms of its effect on cash flows, fixed asset turnover, and
earnings per share. Assuming that the company is most interested in maintaining a high
EPS during year 1 and 2, which method would you recommend? Assuming that the
company is most interested in reducing taxes during year 1 and 2, which method would
you recommend?










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