New Morning Bakery is in the process of closing its operations. It sold its two-year-old bakery ovens to Great Harvest Bakery for $620,000. The ovens originally cost $822,000, had an estimated service life of 10 years, had an estimated residual value of $52,000, and were depreciated using straight-line depreciation. Complete the requirements below for New Morning Bakery.Problem 7-8A (Algo) Part 1Required:1. Calculate the balance in the accumulated depreciation account at the end of the second year.
Question
New Morning Bakery is in the process of closing its operations. It sold its two-year-old bakery ovens to Great Harvest Bakery for 822,000, had an estimated service life of 10 years, had an estimated residual value of $52,000, and were depreciated using straight-line depreciation. Complete the requirements below for New Morning Bakery.Problem 7-8A (Algo) Part 1Required:1. Calculate the balance in the accumulated depreciation account at the end of the second year.
Solution
To calculate the balance in the accumulated depreciation account at the end of the second year, we need to understand how straight-line depreciation works.
Straight-line depreciation is a method of calculating depreciation where the value of an asset is reduced equally over its useful life.
The formula for straight-line depreciation is:
(Depreciable cost / Useful life of the asset)
Where:
- Depreciable cost = Cost of the asset - Residual value
- Useful life of the asset = Estimated service life
Given in the problem:
- Cost of the asset = $822,000
- Residual value = $52,000
- Estimated service life = 10 years
Let's plug these values into the formula:
Depreciable cost = 52,000 = $770,000
So, the annual depreciation expense = 77,000
Since we are looking for the balance in the accumulated depreciation account at the end of the second year, we multiply the annual depreciation expense by 2:
Accumulated depreciation = 154,000
So, the balance in the accumulated depreciation account at the end of the second year is $154,000.
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