Chapter 11 — Long-Lived Assets
The module's primary reading · ~40–50 minutes · Objective 7 (account for long-lived assets, including cost, depreciation by three methods, and disposal, and for current liabilities, including payroll), with Objective 3 (apply accrual accounting: recognize revenue and expenses in the right period, prepare adjusting entries for deferrals and accruals, and prepare an adjusted trial balance) called back · Read it first this week; the lecture, the slides, the tutorial, the quiz, and the workshop all build on it.
In plain language
Some things a business buys are used up in a month, and some are used for years. This week you learn to record the second kind, the long-lived assets (things a business keeps and uses for more than a year, such as a van or a machine). You will find what an asset really cost and then spread that cost over the years that use it, which is called depreciation (moving part of an asset's cost into expense each year). You will compare three ways of doing that spreading and record what happens when the business sells the asset. By the end, you can explain why a van's book value is not its price on a used-car lot.
Why you already care about this
Picture the bicycle shop on the day its new delivery van arrives. The van's price was $28,000. The dealer charged $1,500 to deliver it. The shop paid $500 more to set it up for carrying bicycles. The shop expects to drive it for 5 years. So what did the van cost, and how much of that cost belongs to this year?
You have faced a smaller version of this question. Maybe you bought a $1,200 laptop that you expect to use for all 4 years of your studies. It would feel strange to say the laptop cost you $1,200 in the first year and nothing after that. It is fairer to say it cost you $300 a year, because you use it every year. That is the whole idea of depreciation, and this chapter turns it into the way accountants measure it.
By the end of this chapter you will be able to:
- name the three groups of long-lived assets;
- measure an asset's cost, including freight and setup;
- compute depreciation by the straight-line, units-of-production, and double-declining-balance methods;
- build a depreciation schedule and read book value from it;
- compare the three methods by their effects, without ranking them;
- record the sale of an asset with its gain or loss.
Carry this sentence with you: depreciation spreads a cost; it does not measure a price.
Where we are
- Already covered: Week 4 recorded the shop's first depreciation and met Accumulated Depreciation and book value. Week 5 placed property, plant, and equipment on the classified balance sheet. Week 7 compared inventory methods by their effects. Week 10 measured what customers owe.
- This week: the cost of a long-lived asset; straight-line, units-of-production, and double-declining-balance depreciation; disposal with a gain or loss; and intangible assets and natural resources, in words.
- How they connect: each year's depreciation is a Week 4 adjusting entry, and the van's book value is a Week 5 balance sheet line.
- Where we're going next: Week 12, Current Liabilities and Payroll, crosses to the other side of the balance sheet, to the debts the shop owes within a year.
In Week 4, the shop's $12,000 of equipment was expected to last 5 years with no residual value, so the shop recorded $200 of depreciation a month. That entry debited Depreciation Expense and credited Accumulated Depreciation, a contra asset with a credit balance. You also met book value, an asset's cost minus its accumulated depreciation. In Week 5, those figures took their place under property, plant, and equipment on the balance sheet. In Week 7, you compared FIFO and LIFO by what each did to cost of goods sold, never by which was better. This week you use every one of those ideas on a bigger asset and with three methods instead of one.
1. Name the long-lived assets
Walk through the bicycle shop with your eyes open and point at what it owns. The cash in the safe will be spent this month. The shop supplies on the shelf will be used up soon. But the work stands, the wheel-truing station, and now the van will serve the shop for years.
Those are the shop's long-lived assets. Here is the course's definition, set off so you can find it again when you need it:
- Long-lived assets are the assets a business uses in its operations for more than one year and does not hold for sale.
They come in three groups:
- Property, plant, and equipment: physical assets such as the van, the shop's work stands, and a building.
- Intangible assets: assets with no physical form that give the business rights or advantages, such as a patent.
- Natural resources: assets taken from the earth or grown on it, such as timber or a mineral deposit.
The phrase "does not hold for sale" matters. The shop also has bicycles in its stockroom, and those are inventory, because the shop bought them to resell. A bicycle dealer's van is equipment; a van dealer's vans are inventory.
Worked example — sorting the shop's assets. The bicycle shop (illustrative) owns a delivery van, $12,000 of repair equipment, a stock of bicycles for sale, and shop supplies. The van and the repair equipment are property, plant, and equipment. The bicycles are inventory, a current asset. The supplies are a current asset too, because they will be used up within a year. In words: only the van and the equipment are long-lived, because only they will serve the shop for years without being sold.
Misconception check. Students often think any expensive item is a long-lived asset. Price does not decide it; use does. A $30,000 van the shop drives for 5 years is a long-lived asset. A $30,000 order of bicycles the shop will sell next month is inventory.
2. Measure an asset's cost
Think about buying a used couch from across town. You pay the seller, but you also rent a truck to bring it home. Did the couch cost you only the seller's price? Most people would say it cost the price plus the truck, because without the truck there is no couch in your living room.
Accounting uses the same logic. Here is the rule:
- The cost of a long-lived asset is everything needed to acquire it and get it ready for use, such as the price, freight, and setup.
Recording a cost in an asset account in this way is called capitalizing it. The cost waits on the balance sheet, and depreciation moves it into expense over the years that use the asset.
Worked example — the van's cost. The bicycle shop (illustrative, Dataset H) buys its delivery van.
- Price: $28,000.
- Freight to deliver the van: $1,500.
- Setup so the van can carry bicycles: $500.
- Cost: 28,000 + 1,500 + 500 = $30,000.
The shop pays cash (an illustrative detail), so it records one entry.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Purchase | Delivery Van | 30,000 | |
| Cash | 30,000 | ||
| Records the van at its full cost. |
The entry balances: debits 30,000 = credits 30,000. Walk it the way you walk every entry. What happened: the shop bought a van and made it ready to use. Which accounts change: Delivery Van rises, and Cash falls. The debit and the credit: debit Delivery Van 30,000; credit Cash 30,000. The effect on the statements: total assets do not change, because one asset replaced another, and the income statement shows nothing yet.
A second case makes the rule feel natural. A coffee roaster (illustrative) buys a roasting machine for $18,000, pays $700 to ship it, and pays $1,300 to install it and connect its vent. Its cost is 18,000 + 700 + 1,300 = $20,000. In words: the roaster cannot roast a single bean until the machine has arrived and been installed, so all three amounts are part of the machine's cost.
One caveat: the rule covers costs that get the asset ready. Once the van is on the road, an oil change keeps it running for the coming months, and that is an expense of the period it serves.
Misconception check. Students often record the $1,500 delivery charge as an expense, because a delivery charge feels like a cost of doing business. It is part of the van's cost. The van could not do any work until it arrived, so the charge goes into Delivery Van and is spread over the van's 5 years along with the price.
3. Treat depreciation as cost allocation
Go back to the laptop. After a year, you could sell it for some amount, maybe more or less than you expect. That resale price is interesting, but it is not what you used up. What you used up is one year of a laptop you planned to keep for 4.
Depreciation follows the second idea, not the first. You met its definition in Week 4: depreciation is the allocation of a long-lived asset's cost to the periods that use it. It is not a measure of the asset's market value, and it is not a cash payment.
Every method needs three estimates:
- Residual value is the amount the business expects to receive for the asset when it stops using it. The asset is never depreciated below it.
- Useful life is how long the business expects to use the asset, in years or in units of use such as miles.
- Depreciable cost is the part of the cost that gets used up: cost minus residual value.
Worked example — the van's three estimates. The shop (illustrative, Dataset H) expects to sell the van for $3,000 when it is done with it, and it expects to use the van for 5 years or 90,000 miles. Depreciable cost is 30,000 − 3,000 = $27,000. In words: of the van's $30,000 cost, $27,000 will be used up over its life, and $3,000 should come back when the shop sells it.
You may notice that all three are estimates. Here is an honesty note: nobody knows on the first day exactly how long the van will last or what it will sell for. The business makes its best estimate, and two businesses with the same van can make different ones.
Misconception check. Students often think depreciation tracks what the van would sell for, or that it is money leaving the bank. Neither is true. A used van's price can jump or drop in a month while the depreciation stays the same. The entry debits Depreciation Expense and credits Accumulated Depreciation, and Cash appears nowhere in it.
4. Spread the cost evenly: the straight-line method
Suppose you split the cost of a streaming plan evenly with a roommate every month. Each month looks like every other month. The straight-line method treats an asset's years the same way.
- The straight-line method records the same depreciation in each full year: (cost − residual value) ÷ useful life.
A depreciation schedule is a table that lists each period's depreciation, the Accumulated Depreciation to date, and the book value that remains.
Worked example — the van, straight-line. For the shop's van (illustrative, Dataset H):
- Straight-line: (30,000 − 3,000) ÷ 5 = 27,000 ÷ 5 = $5,400 a year.
- Straight-line rate: 1 ÷ 5 = 0.20, or 20 percent a year.
At the end of each year, the shop records the same adjusting entry.
| Date | Account | Debit | Credit |
|---|---|---|---|
| End of each year | Depreciation Expense | 5,400 | |
| Accumulated Depreciation | 5,400 | ||
| Records one year of the van's depreciation. |
The entry balances: debits 5,400 = credits 5,400. Like every Week 4 adjustment, it touches one income statement account and one balance sheet account, and it never touches Cash.
Now you build the schedule. Each year's book value is the year before minus $5,400.
| Year | Depreciation | Accumulated Depreciation | Book value |
|---|---|---|---|
| Start | 0 | 30,000 | |
| 1 | 5,400 | 5,400 | 24,600 |
| 2 | 5,400 | 10,800 | 19,200 |
| 3 | 5,400 | 16,200 | 13,800 |
| 4 | 5,400 | 21,600 | 8,400 |
| 5 | 5,400 | 27,000 | 3,000 |
| Total | 27,000 |
Foot it. The depreciation column is 5,400 × 5 = $27,000, the depreciable cost. The last book value is $3,000, the residual value. In words: straight-line moves $5,400 of the van's cost into expense every year and leaves $3,000 on the books at the end.
The balance sheet shows the van at cost, less its Accumulated Depreciation.
| The bicycle shop — Balance Sheet (property, plant, and equipment, in part) — End of Year 1 | ||
|---|---|---|
| Delivery Van | $30,000 | |
| Less: Accumulated Depreciation | (5,400) | $24,600 |
In practice (your tools). In a free spreadsheet such as Google Sheets, put the cost in B1, the residual value in B2, and the useful life in B3. In B5 enter =SLN(B1,B2,B3), which returns 5,400. List the years 1 to 5 in A6:A10, put =B$5 in B6:B10, and in C6 enter =B$1-SUM(B$6:B6) and fill it down for each year's book value.
Misconception check. Students often read the $24,600 book value as what the van is worth on the market. It is the cost the shop has not yet moved into expense. A buyer might pay more or less than $24,600 for the van.
5. Tie the cost to use: the units-of-production method
Think about a person who rents out a pressure washer by the hour. A month with many rentals wears it out faster than a slow month. It would be fair to charge more of its cost to the busy month.
- The units-of-production method ties depreciation to use: (cost − residual value) ÷ total expected units × units used.
Worked example — the van, by the mile. The shop (illustrative, Dataset H) expects to drive the van 90,000 miles.
- Units-of-production rate: 27,000 ÷ 90,000 miles = $0.30 a mile.
- Units-of-production, Year 1: 20,000 miles × $0.30 = $6,000; book value 30,000 − 6,000 = $24,000.
The entry has the same shape as before: debit Depreciation Expense 6,000; credit Accumulated Depreciation 6,000. In words: the van drove 20,000 miles in its first year, so $6,000 of its cost moved into expense, $600 more than straight-line's $5,400.
The pattern you see follows the miles. A year with more miles gets more depreciation, and a year with fewer miles gets less. Over all 90,000 miles, the method moves the same $27,000 into expense, because 90,000 × $0.30 = $27,000.
Misconception check. Students often apply the $0.30 to the full $30,000 cost, or divide the full cost by the miles. The rate comes from depreciable cost, 27,000 ÷ 90,000, because the $3,000 residual value is never used up.
6. Front-load the cost: the double-declining-balance method
A new phone loses a lot of its usefulness in its first year, as newer models arrive, and less in each year after. Some assets give more of their service early. An accelerated method records more depreciation in the early years and less later.
- The double-declining-balance method multiplies the asset's book value at the start of each year by twice the straight-line rate, and stops when book value reaches residual value.
Two details can trip you up. First, you do not subtract residual value at the start; the rate is applied to the full book value. Second, residual value is the floor, so the last year's depreciation is whatever brings book value down to it.
Worked example — the van, double-declining-balance. For the van (illustrative, Dataset H):
- Double-declining-balance rate: 2 × 20 percent = 40 percent.
- Year 1: 30,000 × 0.40 = $12,000; book value 30,000 − 12,000 = $18,000.
- Year 2: 18,000 × 0.40 = $7,200; book value 18,000 − 7,200 = $10,800.
- Year 3: 10,800 × 0.40 = $4,320; book value 10,800 − 4,320 = $6,480.
- Year 4: 6,480 × 0.40 = $2,592; book value 6,480 − 2,592 = $3,888.
- Year 5: 3,888 × 0.40 = $1,555.20 would leave 3,888 − 1,555.20 = $2,332.80. That is below the $3,000 residual value, so Year 5 is 3,888 − 3,000 = $888, and book value ends at $3,000.
| Year | Book value at start | Depreciation | Accumulated Depreciation | Book value at end |
|---|---|---|---|---|
| 1 | 30,000 | 12,000 | 12,000 | 18,000 |
| 2 | 18,000 | 7,200 | 19,200 | 10,800 |
| 3 | 10,800 | 4,320 | 23,520 | 6,480 |
| 4 | 6,480 | 2,592 | 26,112 | 3,888 |
| 5 | 3,888 | 888 | 27,000 | 3,000 |
| Total | 27,000 |
Foot it: 12,000 + 7,200 + 4,320 + 2,592 + 888 = $27,000, the same depreciable cost as straight-line. In words: double-declining-balance moves $12,000 of the van's cost into Year 1 and only $888 into Year 5, and it still stops at the $3,000 residual value.
In practice (your tools). Google Sheets has a built-in function for this method. With the cost in B1, the residual value in B2, and the life in B3, =DDB(B1,B2,B3,1) returns Year 1's 12,000, and changing the last argument to 5 returns Year 5's 888. Check its results against your own schedule; a formula is only as good as the numbers you give it.
Misconception check. Students often keep multiplying by 40 percent in the last year, which would take book value down to $2,332.80. That goes below the $3,000 the shop expects to receive for the van. Double-declining-balance never takes book value below residual value, so Year 5 stops at $888.
7. Compare the methods by their effects
Imagine three friends who each owe $300 for the same trip. One pays $60 a month for 5 months. One pays more in the first months. One pays according to the miles driven each month. Each friend pays $300 in the end; only the timing differs.
The three depreciation methods behave the same way. GAAP allows each of them, and a business picks the one that fits how it expects to use the asset. Once it picks, it applies the method consistently, as you saw with inventory methods in Week 7. The course compares them by their effects and never says one is better.
Worked example — Year 1, three ways. For the van (illustrative, Dataset H), Year 1's depreciation is:
- straight-line: $5,400;
- units-of-production, in a 20,000-mile year: $6,000;
- double-declining-balance: $12,000, which is 12,000 − 5,400 = $6,600 more than straight-line.
| Year | Straight-line | Double-declining-balance |
|---|---|---|
| 1 | 5,400 | 12,000 |
| 2 | 5,400 | 7,200 |
| 3 | 5,400 | 4,320 |
| 4 | 5,400 | 2,592 |
| 5 | 5,400 | 888 |
| Total | 27,000 | 27,000 |
Read the table's effects in words, as you would for a reader of the statements. Both columns total $27,000. Double-declining-balance records more expense in Years 1 and 2 and less in Years 3, 4, and 5. So in the early years it shows lower net income and a lower book value, and in the later years it shows higher net income. The double-declining-balance rate, 40 percent versus the straight-line 20 percent, is a 2-fold rate, yet the total never changes.
Here is a limitation worth naming. This course teaches depreciation for financial statements only. Tax rules for depreciation are a separate subject, and this course does not cover them.
Misconception check. Students often think the method that shows more depreciation makes the business poorer. The business owns the same van and spent the same $30,000 under every method. The methods change only which years carry the expense, not the total and not the cash.
Pause and think (choose one). (a) Imagine you are a lender comparing two repair shops with identical vans. One uses straight-line and one uses double-declining-balance. What would you want to know before comparing their Year 1 net income? (b) Imagine you are one of the shop's founders. How would you explain to your co-founder why the van's Year 1 expense could be $5,400 or $12,000 when the van cost the same?
8. Dispose of an asset: gain or loss
Suppose you sell your old bike for $150. Did you make $150? Not really; you gave up a bike to get it. Whether you came out ahead depends on what the bike was still worth on your own books.
When a business sells a long-lived asset, it compares the cash with the book value on the day of the sale.
- The gain or loss on disposal is the cash received minus the asset's book value on the date of sale. More cash than book value is a gain; less is a loss.
Worked example — selling the van. The shop (illustrative, Dataset H) uses straight-line and sells the van at the end of Year 3 for $12,500.
- Accumulated Depreciation after 3 years, straight-line: 5,400 × 3 = $16,200.
- Book value at the sale: 30,000 − 16,200 = $13,800.
- Loss on the sale: cash received − book value = 12,500 − 13,800 = −1,300, a loss of $1,300.
The entry removes the van and its Accumulated Depreciation, and records the cash and the loss.
| Date | Account | Debit | Credit |
|---|---|---|---|
| End of Year 3 | Cash | 12,500 | |
| Accumulated Depreciation | 16,200 | ||
| Loss on Sale of Delivery Van | 1,300 | ||
| Delivery Van | 30,000 | ||
| Removes the van and its Accumulated Depreciation and records the cash and the loss. |
The entry balances: debits 12,500 + 16,200 + 1,300 = 30,000 = credits 30,000. Walk it. What happened: the shop gave up a van with a $13,800 book value and received $12,500. Which accounts change: Cash rises; Delivery Van and its Accumulated Depreciation are both removed; a loss is recorded. The effect on the statements: the income statement shows a $1,300 loss, and the balance sheet no longer shows the van.
What if the shop had used double-declining-balance? Accumulated Depreciation after 3 years would be 12,000 + 7,200 + 4,320 = $23,520, and book value would be 30,000 − 23,520 = $6,480. The same $12,500 sale would show a gain of 12,500 − 6,480 = $6,020.
Now you can look at the three years as a whole. Under straight-line, depreciation plus the loss is 16,200 + 1,300 = $17,500. Under double-declining-balance, depreciation minus the gain is 23,520 − 6,020 = $17,500. Both equal cost minus cash received, 30,000 − 12,500 = $17,500. In words: the van really cost the shop $17,500 over three years, and the method only decides how much of that shows up as depreciation and how much as a gain or loss.
Misconception check. Students often read the $12,500 sale price as a gain, because cash came in. A gain or loss is not the sale price. The shop gave up a van carried at $13,800 to receive $12,500, so it lost $1,300.
9. Account for intangible assets and natural resources
A song you buy a license to use, a brand name, a patent on an invention: you cannot touch any of them, yet a business can pay a lot for them. Timber and stone are the opposite: very physical, and used up as they are taken.
You learn this section in words; the course keys the ideas, not computations.
- Amortization of an intangible asset is the allocation of the cost of an intangible asset with a finite life, such as a patent, to the periods of its useful life. It plays the role depreciation plays for a van.
- Goodwill is the amount a buyer pays for a whole business beyond the value of that business's identifiable assets minus its liabilities. Under the general GAAP rule, goodwill is not amortized; private companies and not-for-profit entities may elect to amortize it.
- Depletion is the allocation of a natural resource's cost to the periods in which its units are taken out.
Worked example — a patent and a quarry. A small software firm (illustrative) buys a patent for $60,000, and it expects the patent to give it an advantage for 10 more years. Its amortization is 60,000 ÷ 10 = $6,000 a year. A stone quarry (illustrative) costs $500,000 and is expected to yield 250,000 tons, so depletion is 500,000 ÷ 250,000 = $2 a ton. In words: the patent's cost is spread over its years, and the quarry's cost is spread over its tons, the way the van's cost was spread over its years or its miles.
Misconception check. Students often think every intangible asset is amortized, goodwill included. Under the general GAAP rule, goodwill is not amortized, although private companies and not-for-profit entities may elect to amortize it. A patent, with its finite life, is amortized.
Now say the whole week in one plain sentence. The van cost $30,000, and every method moves $27,000 of that cost into expense over the van's life; the methods differ only in which years carry more of it. Selling the van for $12,500 at a $13,800 book value records a $1,300 loss.
Key terms
- Long-lived assets — The assets a business uses in its operations for more than one year and does not hold for sale. (first used: 1. Name the long-lived assets)
- Intangible assets — Long-lived assets that have no physical form but give the business rights or advantages, such as a patent. (first used: 1. Name the long-lived assets)
- Natural resources — Long-lived assets taken from the earth or grown on it, such as timber or a mineral deposit. (first used: 1. Name the long-lived assets)
- Cost of a long-lived asset — Everything needed to acquire the asset and get it ready for use, such as the price, freight, and setup. (first used: 2. Measure an asset's cost)
- Capitalizing — Recording a cost in an asset account, rather than as an expense, because it buys benefits for future periods. (first used: 2. Measure an asset's cost)
- Residual value — The amount a business expects to receive for an asset when it stops using it. (first used: 3. Treat depreciation as cost allocation)
- Useful life — How long a business expects to use an asset, in years or in units of use such as miles. (first used: 3. Treat depreciation as cost allocation)
- Depreciable cost — Cost minus residual value: the part of an asset's cost that gets used up. (first used: 3. Treat depreciation as cost allocation)
- Straight-line method — A depreciation method that records the same amount in each full year: (cost − residual value) ÷ useful life. (first used: 4. Spread the cost evenly: the straight-line method)
- Depreciation schedule — A table of each period's depreciation, the Accumulated Depreciation to date, and the book value that remains. (first used: 4. Spread the cost evenly: the straight-line method)
- Units-of-production method — A depreciation method that ties depreciation to use: (cost − residual value) ÷ total expected units × units used. (first used: 5. Tie the cost to use: the units-of-production method)
- Double-declining-balance method — An accelerated method that multiplies book value by twice the straight-line rate and stops at residual value. (first used: 6. Front-load the cost: the double-declining-balance method)
- Gain or loss on disposal — The cash received for a sold asset minus its book value on the date of sale. (first used: 8. Dispose of an asset: gain or loss)
- Amortization of an intangible asset — The allocation of a finite-life intangible asset's cost to the periods of its useful life. (first used: 9. Account for intangible assets and natural resources)
- Goodwill — The amount a buyer pays for a whole business beyond its identifiable assets minus its liabilities; under the general GAAP rule it is not amortized. (first used: 9. Account for intangible assets and natural resources)
- Depletion — The allocation of a natural resource's cost to the periods in which its units are taken out. (first used: 9. Account for intangible assets and natural resources)
Summary
- Long-lived assets are used for more than a year and are not held for sale.
- An asset's cost includes everything needed to get it ready for use.
- Depreciation allocates cost; it does not measure market value or move cash.
- Straight-line spreads depreciable cost evenly over the useful life.
- Units-of-production spreads it by use, such as miles.
- Double-declining-balance front-loads it and stops at residual value.
- Every method moves the same depreciable cost into expense over the asset's life.
- A gain or loss on disposal is cash received minus book value.
- Finite-life intangibles are amortized; goodwill is not, under the general GAAP rule; natural resources are depleted.
Check your understanding
Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.
- A food truck (illustrative) buys a griddle for $4,600, pays $250 to ship it, and pays $150 to install it. It expects to use the griddle for 4 years and then sell it for $500. Compute the griddle's cost, its straight-line depreciation, and its book value after 2 years.
- A print shop (illustrative) buys a press for $20,000 with a residual value of $2,000 and a 4-year life. Build its double-declining-balance schedule, and explain what happens in Year 4.
- A farm (illustrative) buys a tractor for $52,000. It expects to use it for 8,000 hours and then sell it for $4,000. Compute the units-of-production rate and the depreciation for a year in which the tractor runs 1,100 hours.
- A dog-grooming service (illustrative) sells a drying cabinet that cost $9,000 and has $6,500 of Accumulated Depreciation. It receives $3,100 in cash. Compute the gain or loss, write the entry, and explain why the gain is not $3,100.
Answers (worked reasoning — read after attempting)
- The griddle's cost is 4,600 + 250 + 150 = $5,000, because shipping and installation were needed to make it ready. Straight-line depreciation is (5,000 − 500) ÷ 4 = 4,500 ÷ 4 = $1,125 a year. After 2 years, Accumulated Depreciation is 1,125 × 2 = $2,250, so book value is 5,000 − 2,250 = $2,750.
- The straight-line rate is 1 ÷ 4 = 25 percent, so the rate is 2 × 25 = 50 percent. Year 1 is 20,000 × 0.50 = $10,000, leaving $10,000. Year 2 is 10,000 × 0.50 = $5,000, leaving $5,000. Year 3 is 5,000 × 0.50 = $2,500, leaving $2,500. In Year 4, 50 percent of $2,500 would be $1,250 and leave $1,250, below the $2,000 residual value, so Year 4 is 2,500 − 2,000 = $500. The total is 10,000 + 5,000 + 2,500 + 500 = $18,000, which equals 20,000 − 2,000.
- Depreciable cost is 52,000 − 4,000 = $48,000, so the rate is 48,000 ÷ 8,000 = $6 an hour. A 1,100-hour year carries 1,100 × $6 = $6,600 of depreciation. The residual value comes out first, because it is never used up.
- Book value is 9,000 − 6,500 = $2,500, so the gain is 3,100 − 2,500 = $600. Debit Cash 3,100; debit Accumulated Depreciation 6,500; credit Equipment 9,000; credit Gain on Sale of Equipment 600. Debits 3,100 + 6,500 = 9,600 = credits 9,000 + 600 = 9,600. The $3,100 is the cash received; the service gave up a cabinet carried at $2,500 to get it, so only the $600 difference is a gain.
Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, the quiz, the discussion, and the assignment; next week the FLSA overtime rule turns the mechanic's hours into a paycheck.
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