On January 1, 20X2, The GenKota Winery purchased a new bottling system. The system has an expected life of 5 years. The system cost $325,000. Shipping, installation, and set up was an additional $35,000. At the end of the useful life, Julie Hayes, chief accountant for GenKota, expects to dispose of the bottling system for $96,000. She further anticipates total output of 660,000 bottles over the useful life.
(a) Assuming use of the straight-line depreciation method, prepare a schedule showing annual depreciation expense, accumulated depreciation, and related calculations for each year.
(b) Assuming use of the units-of-output depreciation method, prepare a schedule showing annual depreciation expense, accumulated depreciation, and related calculations for each year. Actual output, in bottles, was 100,000 (20X2), 130,000 (20X3), 150,000 (20X4), 160,000 (20X5), and 120,000 (20X6).
(c) Assuming use of the double-declining balance depreciation method, prepare a schedule showing annual depreciation expense, accumulated depreciation, and related calculations for each year.
(d) Assume that GenKota sold the bottling system for $50,000 at the end of its useful life. Prepare the journal entry to record the disposal sale.
Working data required for the solution:
1. Original Cost of bottling system will be = Purchase price + Shipping, installation and setup cost
= $325000 + $35000 = $360000
2. Salvage value = Value that could be realized on disposal at the end of useful life of the asset.
3. Depreciable Amount = Amount on which depreciation is required to be provided
= Original Cost - Salvage Value = $360000 - $96000 = $264000
4. Depreciation under Straight line method(SLM) for each year would be = (Original Cost -Salvage Value)/ Useful life of asset
= ($360000 - $96000) / 5 Years
= $52800 per year
5. Depreciation under double-declining balance depreciation method would be
Depreciation rate = Depreciation expense under SLM / Depreciable Amount
= $52800 / $264000 = 20% p.a.
Therefore depreciation rate under double-declining balance depreciation method will be = 20% * 2 = 40%
a. Schedule showing annual depreciation expense, accumulated depreciation, and related calculations for each year using straight-line depreciation method:
| 31-12-20x2 | 31-12-20x3 | 31-12-20x4 | 31-12-20x5 | 31-12-20x6 | |
| A. Original Cost/ Carrying amount of an asset ($) | 360000 | 307200 | 254400 | 201600 | 148800 |
| B. Depreciation for each year ($) (see point 4 of working data) | 52800 | 52800 | 52800 | 52800 | 52800 |
| C. Accumulated Depreciation till date ($) | 52800 | 105600 | 158400 | 211200 | 264000 |
| D. Book Value at the end of the year (A - B) ($) | 307200 | 254400 | 201600 | 148800 | 96000 |
b. Schedule showing annual depreciation expense, accumulated depreciation, and related calculations for each year using units of output depreciation method:
| 31-12-20x2 | 31-12-20x3 | 31-12-20x4 | 31-12-20x5 | 31-12-20x6 | |
| A. Original Cost/ Carrying amount of an asset ($) | 360000 | 320000 | 268000 | 208000 | 144000 |
| B. Depreciable amount ($) (see point 3 of working data) | 264000 | 264000 | 264000 | 264000 | 264000 |
| C. Units Produced during the year (Given) | 100000 | 130000 | 150000 | 160000 | 120000 |
| D. Total Production in units | 660000 | 660000 | 660000 | 660000 | 660000 |
| E. Depreciation for the year will be [(B * C)/D] ($) | 40000 | 52000 | 60000 | 64000 | 48000 |
| F. Accumulated Depreciation till date ($) | 40000 | 92000 | 152000 | 216000 | 264000 |
| G. Book Value at the end of the year (A - B) ($) | 320000 | 268000 | 208000 | 144000 | 96000 |
c. Schedule showing annual depreciation expense, accumulated depreciation, and related calculations for each year using double-declining balance depreciation method:
| 31-12-20x2 | 31-12-20x3 | 31-12-20x4 | 31-12-20x5 | 31-12-20x6 | |
| A. Original Cost/ Carrying amount of an asset ($) | 360000 | 254400 | 148800 | 96000 | 96000 |
| B. Depreciable amount ($) (see point 3 of working data) | 264000 | 264000 | 264000 | 264000 | 264000 |
| C. Depreciation rate for each year ($) (see point 5 of working data) | 40% | 40% | 40% | 40% | 40% |
| D. Depreciation for the year will be (B * C) ($) | 105600 | 105600 | 52800 | 0 | 0 |
| E. Accumulated Depreciation till date ($) | 105600 | 211200 | 264000 | 264000 | 264000 |
| F. Book Value at the end of the year (A - D) ($) | 254400 | 148800 | 96000 | 96000 | 96000 |
Depreciation for the year 31-12-20x4 will be restricted to $52800 because the carrying amount of an asset will not be less than its salvage value ($96000).
Depreciation for the year 31-12-20x5 and year 31-12-20x6 will not be charged as the carrying amount is equal to its salvage value i.e. $96000 and therefore no further depreciation is charged.
d. Journal entry on sale of bottling system for $50000 at the end of the useful life:
Date Account Title Debit (Dr.) Credit (Cr.)
31-12-20x6 Cash/ Bank A/c ............................ Dr. $50000
Profit and Loss A/c ........................Dr. $46000
To Bottling System A/c (Asset) ...............Cr. $96000
On January 1, 20X2, The GenKota Winery purchased a new bottling system. The system has an...