Highsmith Rental Company purchased an apartment building early in 2021. There are 20 apartments in the building and each is furnished with major kitchen appliances. The company has decided to use the group depreciation method for the appliances. The following data are available: Appliance Cost       Residual Value       Service Life (in Years)
Stoves $15,000 $3,000 6
Refrigerators 10,000 1,000 5
Dishwashers 8,000 500 4

In 2019, three new refrigerators costing $2,700 were purchased for cash. The old refrigerators, which originally cost $1,500, were sold for $200.

Requried:
a. Calculate the group depreciation rate, group life, and depreciation for 2016.
b. Prepare the journal entries to record the purchase of the new refrigerators and the sale of the old refrigerators.

A. Group depreciation rate 17.197%

Group life 5.02 years

Depreciation for 2016 $5,675

B. 2019

Dr Stove, refrigerator and dishwasher$2,700

Cr Cash $2,700

2019

Dr Accumulated Depreciation$1,300

Dr Cash$200

Cr Stove, refrigerator and dishwasher $1,500

Explanation:

A. Calculation to determine the group depreciation rate, group life, and depreciation for 2016.

First step is the Computation of Group depreciation rate, group life and depreciation for 2016

AssetsOriginalResidualDepreciationEstimatedDepreciation

CostValueCostLife-Yearsper year-SLM

Stoves$15,000-$3,000=$12,0006 $2,000 ($12,000/6=$2,000)

Refrigerators$10,000-$1,000=$9,000 5 $1,800 ($9,000/5=$1,800)

Dishwashers$8,000-$500=$7,5004 $1,875

($7,500/4=$1,875)

Total$33,000$4,500$28,500$5,675

Now let determine the group depreciation rate, group life, and depreciation for 2016.

Calculation for group depreciation rate using this formula

Group Depreciation Rate = Total depreciation per year ÷ Total original cost

Let plug in the formula

Group depreciation rate = $5,675 ÷ $33,000*100

Group depreciation rate= 17.197%

Calculation for Group life using this formula

Group life = Total depreciation cost ÷ Total depreciation per year

Let plug in the formula

Group life = $28,500 ÷ $5,675

Group life = 5.02 years

Calculation for Depreciation for 2016 using this formula

Depreciation for 2016= Original Cost × Group Depreciation Rate

Let plug in the formula

Depreciation for 2016 = $33,000 × 0.17197

Depreciation for 2016= $5,675

Therefore the group depreciation rate is 17.197%, group life is 5.02 years, and depreciation for 2016 is $5,675

B. Preparation of the journal entries to record the purchase of the new refrigerators and the sale of the old refrigerators.

2019

Dr Stove, refrigerator and dishwasher$2,700

Cr Cash $2,700

(To record purchase of new refrigerator)

2019

Dr Accumulated Depreciation$1,300

($1,500-$200)

Dr Cash$200

Cr Stove, refrigerator and dishwasher $1,500

(To record sale of old refrigerator)

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