Problem 8-29A: Computing and recording units-of-production depreciation

Sabel Co. purchased assembly equipment for $500,000 on January 1, Year 1. Sabel’s financial condition immediately prior to the purchase is shown in the following horizontal statements model:

The equipment is expected to have a useful life of 200,000 machine hours and a salvage value of $20,000. Actual machine-hour use was as follows:

Required

a. Compute the depreciation for each of the five years, assuming the use of units-of-production depreciation.

b. Assume that Sabel earns $230,000 of cash revenue during Year 1. Record the purchase of the equipment and the recognition of the revenue and the depreciation expense for the first year in a financial statements model like the preceding one.

c. Assume that Sabel sold the equipment at the end of the fifth year for $20,600. Record the general journal entry for the sale.

Problem 8-30A: Calculating depreciation expense using four different methods

Banko Inc. manufactures sporting goods. The following information applies to a machine purchased on January 1, Year 1:

During Year 1, the machine produced 36,000 units, and during Year 2 it produced 38,000 units.

Required

Determine the amount of depreciation expense for Year 1 and Year 2 using each of the following methods:

a. Straight-line

b. Double-declining-balance

c. Units-of-production

d. MACRS, assuming that the machine is classified as seven-year property

Problem 8-31A: Purchase and use of tangible asset: three accounting cycles, straight-line depreciation

The following transactions relate to Academy Towing Service. Assume the transactions for the purchase of the wrecker and any capital improvements occur on January 1 of each year.

Year 1

1. Acquired $70,000 cash from the issue of common stock.
2. Purchased a used wrecker for $32,000. It has an estimated useful life of three years and a $5,000 salvage value.
3. Paid sales tax on the wrecker of $3,000.
4. Collected $56,100 in towing fees.
5. Paid $12,000 for gasoline and oil.
6. Recorded straight-line depreciation on the wrecker for Year 1.
7. Closed the revenue and expense accounts to Retained Earnings at the end of Year 1.

Year 2

1. Paid for a tune-up for the wrecker’s engine, $900.
2. Bought four new tires, $1,250.
3. Collected $62,000 in towing fees.
4. Paid $18,000 for gasoline and oil.
5. Recorded straight-line depreciation for Year 2.
6. Closed the revenue and expense accounts to Retained Earnings at the end of Year 2.

Year 3

1. Paid to overhaul the wrecker’s engine, $4,800, which extended the life of the wrecker to a total of four years. The salvage value did not change.
2. Paid for gasoline and oil, $19,100.
3. Collected $65,000 in towing fees.
4. Recorded straight-line depreciation for Year 3.
5. Closed the revenue and expense accounts at the end of Year 3.

Required

a. Use a horizontal statements model like the following one to show the effect of these transactions on the elements of financial statements. Use + for increase, − for decrease, and NA for not affected. The first event is recorded as an example.

b. For each year, record the transactions in general journal form and post them to T-accounts.

c. Use a vertical model to present financial statements for Year 1, Year 2, and Year 3.