(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.)
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
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.
Computing basics of the old machine
June 1, 2015 Purchase
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:
Less: Fair value
Loss on exchange
Cost of removal
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
The fair value of an old machine
The total cost of the new machine
Depreciation for the year beginning June 1, 2019
Presented below is information related to equipment owned by Pujols Company at December 31, 2017.
Cost (residual value $0)
Accumulated depreciation to date
Fair value less cost of disposal
Assume that Pujols will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 8 years. Pujols uses straight-line depreciation.
(Depreciation—Replacement, Change in Estimate) Greg Maddox Company constructed a building at a cost of $2,200,000 and occupied it beginning in January 1998. It was estimated at that time that its life would be 40 years, with no salvage value.
In January 2018, a new roof was installed at a cost of $300,000, and it was estimated then that the building would have a useful life of 25 years from that date. The cost of the old roof was $160,000.
(Depreciation Basic Concepts) Burnitz Manufacturing Company was organized on January 1, 2017. In 2017, it has used in its reports to management the straight-line method of depreciating its plant assets.
On November 8, you are having a conference with Burnitz’s officers to discuss the depreciation method to be used for income tax and stockholder reporting. James Bryant, president of Burnitz, has suggested the use of a new method, which he feels is more suitable than the straight-line method for the needs of the company during the period of rapid expansion of production and capacity that he foresees. Following is an example in which the proposed method is applied to a fixed asset with an original cost of $248,000, an estimated useful life of 5 years, and a salvage value of approximately $8,000.
Year of life used
Accumulated depreciation at the end of year
Book value at the end of Year
The president favors the new method because he has heard that:
(2) Assume that the Internal Revenue Service accepts the proposed depreciation method in this case. If the proposed method were used for stockholder and tax reporting purposes, how would it affect the availability of cash flows generated by operations?
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