Crane Corporation bought a machine on June 1, 2015, for $32,240, f.o.b. the plac
ID: 2571116 • Letter: C
Question
Crane Corporation bought a machine on June 1, 2015, for $32,240, f.o.b. the place of manufacture. Freight to the point where it was set up was $208, and $520 was expended to install it. The machine’s useful life was estimated at 10 years, with a salvage value of $2,600. On June 1, 2016, an essential part of the machine is replaced, at a cost of $2,059, 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 $36,400, delivered, trading in the old machine which has a fair value and trade-in allowance of $20,800. To prepare the old machine for removal from the plant cost $78, and expenditures to install the new one were $1,560. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $4,160 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 answer to 0 decimal places, e.g. 45,892.)
Explanation / Answer
Old Machine
June 1, 2015
Purchase........................................................
$32,240
Freight
208
Installation.....................................................
520
Total cost...........................................
$32,968
Annual depreciation charge: ($32,968 – $2,600) ÷ 10 = $3,037
On June 1, 2016, debit the old machine for $2,059; the revised total cost is $35,027 ($32,968 + $2,059); thus the revised annual depreciation charge is: ($35,027 – $2,600 – $3,037) ÷ 9 = $3,266.
Book value, old machine, June 1, 2019:
[$35,027 – $3,037 – ($3,266 X 3)] =................................................................
$22,192
Fair value......................................................................................................
(20,800)
Loss on exchange..........................................................................................
1,392
Cost of removal.............................................................................................
78
Total loss...........................................................................................
$ 1,470
New Machine
Basis of new machine
Cash paid ($36,400 – $20,800)
$15,600
Fair value of old machine
20,800
Installation cost
1,560
Total cost of new machine
$37,960
Depreciation for the year beginning June 1, 2019 = ($37,960 – $4,160) ÷ 10 = $3,380.
June 1, 2015
Purchase........................................................
$32,240
Freight
208
Installation.....................................................
520
Total cost...........................................
$32,968