Carla Corporation bought a machine on June 1, 2015, for $32,860, f.o.b. the plac

ID: 2585332 • Letter: C

Question

Carla Corporation bought a machine on June 1, 2015, for $32,860, f.o.b. the place of manufacture. Freight to the point where it was set up was $212, and $530 was expended to install it. The machine’s useful life was estimated at 10 years, with a salvage value of $2,650. On June 1, 2016, an essential part of the machine is replaced, at a cost of $2,099, 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 $37,100, delivered, trading in the old machine which has a fair value and trade-in allowance of $21,200. To prepare the old machine for removal from the plant cost $80, and expenditures to install the new one were $1,590. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $4,240 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.) Depreciation for the year beginning June 1, 2019 $

Explanation / Answer

Solution:

Annual depreciation on the new equipment that should be provided for the fiscal year beginning June 1, 2019

Calculation of total cost of new machine

Particulars

Amount ($)

New Machine cash paid ($37,100-$21,200 trade in value)

$ 15,900

Add: Fair Value of old machine

$ 21,200

Add: Installation cost

$ 1,590

Total Cost of new machine

$ 38,690

Calculation of depreciation on new machine (As per straight line method)

= (Total cost of new machine– Salvage value of new machine) / Useful life

= ($ 38,690 - $ 4,240) / 10

= $ 34,450 / 10

= $ 3,445 (Answer)

Depreciation for the year beginning June 1, 2019 is $ 3,445.