Problem 8-27B Effect of straight-line versus double-declining-balance depreciation on the recognition of expense and gains or losses
National Laundry Services purchased a new steam press on January 1 for $42,000. It is expected to have a five-year useful life and a $4,000 salvage value. National expects to use the steam press more extensively in the early years of its life.
Required
a. Calculate the depreciation expense for each of the five years, assuming the use of straight-line depreciation.
b. Calculate the depreciation expense for each of the five years, assuming the use of double-declining-balance depreciation.
c. Would the choice of one depreciation method over another produce a different amount of cash flow for any year? Why or why not?
d. Assume that National Laundry Services sold the steam press at the end of the third year for $22,000. Compute the amount of gain or loss using each depreciation method.
Problem 8-28B Accounting for depreciation over multiple accounting cycles: straight-line depreciation
Scott Company began operations when it acquired $40,000 cash from the issue of common stock on January 1, Year 1. The cash acquired was immediately used to purchase equipment for $40,000 that had a $4,000 salvage value and an expected useful life of four years. The equipment was used to produce the following revenue stream (assume all revenue transactions are for cash). At the beginning of the fifth year, the equipment was sold for $4,500 cash. Scott uses straight-line depreciation.
| Year | Revenue |
|---|---|
| Year 1 | $9,500 |
| Year 2 | $10,000 |
| Year 3 | $10,500 |
| Year 4 | $8,500 |
| Year 5 | $0 |
Required
Prepare income statements, statements of changes in stockholders’ equity, balance sheets, and statements of cash flows for each of the five years.
Problem 8-29B Computing and recording units-of-production depreciation
Friendly Corporation purchased a delivery van for $28,500 in Year 1. The firm’s financial condition immediately prior to the purchase is shown in the following horizontal statements model: The van was expected to have a useful life of 200,000 miles and a salvage value of $2,500. Actual mileage was as follows:
| Year | Mileage |
|---|---|
| Year 1 | 60,000 |
| Year 2 | 50,000 |
| Year 3 | 55,000 |
Required
a. Compute the depreciation for each of the three years, assuming the use of units-of-production depreciation.
b. Assume that Friendly earns $26,000 of cash revenue during Year 1. Record the purchase of the van and the recognition of the revenue and the depreciation expense for the first year in a financial statements model like the one shown earlier.
c. Assume that Friendly sold the van at the end of the third year for $8,000. Record the general journal entry for the sale.
Senior lecturer at University. 12+ years tutoring algebra and calculus..