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Found in: Page 586

Intermediate Accounting (Kieso)

Book edition 16th
Author(s) Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
Pages 1552 pages
ISBN 9781118743201

(Depreciation Computation—Replacement, Nonmonetary Exchange) George Zidek Corporation bought a machine on June 1, 2015, for $31,000, f.o.b. the place of manufacture. Freight to the point where it was set up was$200, and $500 was expended to install it. The machine’s useful life was estimated at 10 years, with a salvage value of$2,500. On June 1, 2016, an essential part of the machine is replaced, at a cost of $1,980, with one designed to reduce the cost of operating the machine. The cost of the old part and related depreciation cannot be determined with any accuracy. On June 1, 2019, the company buys a new machine of greater capacity for$35,000, delivered, trading in the old machine which has a fair value and trade-in allowance of $20,000. To prepare the old machine for removal from the plant cost$75, and expenditures to install the new one were $1,500. It is estimated that the new machine has a useful life of 10 years, with a salvage value of$4,000 at the end of that time. (The exchange has commercial substance.)Instructions Assuming that depreciation is to be computed on the straight-line basis, compute the annual depreciation on the new equipment that should be provided for the fiscal year beginning June 1, 2019. (Round to the nearest dollar.)

Depreciation expense for old machine = $3,140 Depreciation expense for new machine =$3,250

See the step by step solution

Step-by-Step SolutionStep 1: Meaning of Straight-line depreciation

Straight-line depreciation is the simplest way to assess depreciation over time. By allocating identical amounts to the asset's accounting periods over its useful life, it makes the asset's expense predictable along with smoothing net income.

Step 2: Computing annual depreciation by using a straight-line basis

Computing basics of the old machine

 June 1, 2015 Purchase $31,000 Freight 200 Installation 500 Total cost$31,700

Calculating annual depreciation charge

On June 1, 2016, debit the old machine for $1,980; the revised total cost is$33,680 ($31,700 +$1,980); thus the revised annual depreciation charge is:

Determining book value of old machine

 Book value, old machine, June 1, 2019: $21,340 Less: Fair value 20,000 Loss on exchange 1,340 Cost of removal 75 Total loss$ 1,415

Note: The above computation is done to determine whether there is a gain or loss from the exchange of the old machine with the new machine and to show how the cost of removal might be reported.

Basic of the new machine

 Cash paid $15,000 The fair value of an old machine 20,000 Installation cost 1,500 The total cost of the new machine$36,500

Depreciation for the year beginning June 1, 2019