Chapter 9

Knowledge Check page 469

Dragon Ltd. (Dragon) is a small, privately owned company. A professional
manager manages the company, and the shareholders are not involved in dayto-day management. Recently Dragon began to manufacture products that it
had previously purchased and sold to its customers. Dragon paid $750,000 for
the equipment (the equipment only).
What decisions must Dragons manager make regarding the accounting for the
new equipment before she can calculate the amortization expense for the
current year?
The manager must decide:
o The costs that would be capitalized as part of the cost of the equipment
o The amortization method
o The useful life
Using the following assumptions, calculate the amortization expense for each
year and the ending balance in the accumulated amortization expense using the
straight-line, declining balance, and unit-of-production amortization methods.
For declining balance, use a rate of 50%.
i. The cost of buying and getting the equipment operating was $800,000
($750,000 cost + $50,000 in delivery, set-up, and ancillary costs).
ii. The residual value of the equipment is estimated to be $80,000.
iii. The useful life of the equipment is three years.
iv. The equipment will produce 20,000 units in the first year, 32,000 in the
second year, and 28,000 units in the third year.

Amortization Expense
Year 1
Straight line

Year 2

Year 3

$240,000 $240,000 $240,000

Declining balance

360,000

180,000 180,000*

Unit-of-production

180,000

288,000

252,000

*Based on the calculation the amortization expense

using the declining-balance method should be $90,000,
but because at the end of year three the NBV must be
$80,000 an additional $90,000 should be expensed
Accumulated Amortization
Year 1
Straight line

Year 2

Year 3

$240,000 $480,000 $720,000

Declining balance

360,000

540,000

720,000

Unit-of-production

180,000

468,000

720,000

Prepare the journal entries that would be required for each of the three years
for the straight-line method.
The journal in each year would be the same and would be:
Dr. Amortization expense
240,000
Cr. Accumulated amortization (contra-asset +)
240,000

Knowledge Check page 482

Suppose that in the Ycliff example (pages 527528) the company had sold the
equipment for $750,000 instead of $400,000.
How much amortization would be recorded on the asset for 2010?

$25,000 ((($1,200,000 - $200,000) 10 years) 0.25 years)the amount of

amortization is not affected by the selling price of the equipment.
What would be the gain or loss that Ycliff would report for the sale of the
equipment in 2005?
On the date of sale the NBV of the equipment was $475,000 ($1,200,000 $725,000). The gain on the sale of the equipment would be:
Gain

= Proceeds NBV
= $750,000 $475,000
= $275,000

Prepare the journal entry required to record the sale.

Dr. Cash (asset +)
Dr. Accumulated amortization (contra-asset )
Cr. Gain on sale of equipment
(income statement +, shareholders equity +)
Cr. Equipment (asset )

750,000
725,000
275,000
1,200,000