2005

Accounting for the Use and Disposal of Long-Lived Assets

Nicole’s Getaway Spa (NGS) purchased a hydrotherapy tub system to add to the wellness programs at NGS. The machine was purchased at the beginning of 2011 at a cost of $5,000. The estimated useful life was five years, and the residual value was $500. Assume that the estimated productive life of the machine is 15,000 hours. Expected annual production was: year 1, 4,100 hours; year 2, 2,500 hours; year 3, 3,400 hours; year 4, 1,800 hours; and year 5, 3,200 hours.

Required:

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1. Complete a depreciation schedule for each of the alternative methods.

a. Straight-line.

b. Units-of-production.

c. Double-declining-balance.

2. Assume NGS sold the hydrotherapy tub system for $2,100 at the end of year 3. Prepare the journal entry to account for the disposal of this asset under the three different methods.

3. The following amounts were forecast for the year ended December 31, 2013: Sales Revenues $42,000; Cost of Goods Sold $33,000; Other Operating Expenses $4,000; and Interest Expense $800. Create an income statement for the year ended December 31, 2013 (end of year three) for each of the different depreciation methods, ending at Income before Income Tax Expense. (Don’t forget to include a loss or gain on disposal for each method.)