Chapter 7 In-Class Activity
On January 1, 2019, Lyra Co. bought a new hot-air balloon from AirHead Rides for $10,000. The
estimated useful life of the hot-air balloon is 5 years with a salvage value of $2,000. Lyra Co. has a year-
end of December 31, 2019.
1. Assume Lyra Co. uses the straight-line method of depreciation and records depreciation at
year-end. What is the appropriate journal entry Lyra Co. will record on December 31, 2019
for depreciation?
($10,000 - $2,000) / 5 years = $1,600 annual depreciation
Dr. Depreciation Expense 1,600
Cr. Accumulated Depreciation 1,600
2. Assume Lyra Co. uses the double-declining balance method. Calculate the full year of depreciation
for 2019 and 2020.
2019: $10,000 x 1/5 x 2 = $4,000 annual depreciation
2020: $10,000 - $4,000 = $6,000 beg. BV x 2/5 = $2,400 annual depreciation
Acc. Depreciation at the end of 2020: $4,000 + $2,400 = $6,400
BV at the end of 2020: $10,000 - $6,400 = $3,600
3. Assume Lyra Co. uses the units of production method with an original estimated life of 25,000
hours. Calculate Lyra Co.’s 2019 depreciation if 5,100 hours were used.
($10,000 - $2,000) / 25,000 hours = $0.32 per hour
2019: 5,100 hours used x $0.32 per hour = $1,632 depreciation expense
On January 1, 2019, Bob and Billy Co. purchased communication equipment at a cost of $130,000.
The equipment has an expected residual value of $10,000 and a useful life of 3 years or 4,000 hours.
Assume the straight-line method of depreciation is being used. At the beginning of 2021, Bob and
Billy Co. determine that the useful life of the equipment is actually 5 years and not 3 years, and the
residual value is $5,000 and not $10,000. What would the new depreciation expense be starting in
2021? Would this effect depreciation expense taken in the prior two years?
($130,000 - $10,000) / 3 years = $40,000 annual depreciation
$40,000 + $40,000 = $80,000 in accumulated depreciation at the end of 2020
$130,000 - $80,000 acc. Dep. = $50,000 BV
($50,000 - $5,000) / (5 years – 2 years) = $15,000 new depreciation expense going forward
Use the information from the previous page and assume Lyra Co. uses straight-line depreciation. On
January 1, 2022, Lyra Co. sells the hot-air balloon to the Brickburners for $2,500.
1. What is the appropriate journal entry Lyra Co. will record for the sale of the hot-air balloon on January
1, 2022?
$1,600 + $1,600 + $1,600 = $4,800 accumulated dep. at the end of 2021
$10,000 cost - $4,800 acc. dep = $5,200 BV at end of 2021
$2,500 s/p - $5,200 BV = ($2,700) loss
Dr. Cash 2,500
Dr. Acc. Dep. 4,800
Dr. Loss on Disposal 2,700
Cr. Hot Air Balloon 10,000
2. Instead, assume that Lyra Co. sold the hot-air balloon on January 1, 2024. Record the appropriate
journal entry for the sale.
$4,800 + $1,600 + $1,600 = $8,000 acc. dep.
$10,000 cost - $8,000 acc. dep. = $2,000 BV
$2,500 s/p - $2,000 BV = $500 gain
Dr. Cash 2,500
Dr. Acc. Dep. 8,000
Cr. Hot Air Balloon 10,000
Cr. Gain on Disposal 500
3. On what financial statement does the gain or loss on disposal appear (Balance Sheet or Income
Statement)?
Gains and losses are reported on the I/S (they are included in the “Other” section, after operating
income)
4. What effect do gains have on net income (increase or decrease)? What effect do losses have on net
income?
Losses decrease N/I and gains increase N/I
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