Metlock Corporation bought a machine on June 1, 2015, for $31,620, f.o.b. the pl
ID: 2592258 • Letter: M
Question
Metlock Corporation bought a machine on June 1, 2015, for $31,620, f.o.b. the place of manufacture. Freight to the point where it was set up was $204, and $510 was expended to install it. The machine’s useful life was estimated at 10 years, with a salvage value of $2,550. On June 1, 2016, an essential part of the machine is replaced, at a cost of $2,020, 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 $35,700, delivered, trading in the old machine which has a fair value and trade-in allowance of $20,400. To prepare the old machine for removal from the plant cost $77, and expenditures to install the new one were $1,530. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $4,080 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
Answer
Old machine =
Purchase $31,620
Freight $204
Installation $510
Total cost $32,334
Annual depreciation ($32,334-$2,550)/10=2,978
On June 12016 old machine to be debited by $2,020
Hence revised cost of old machine =32334+2020=34354
Revised depreciation =(34354-2550-2978)/9=3203
Book value of old machine on June 1,2019
[34354-2978-(3203*3)] = 21767
Less:Fair value = 20400
Loss on exchange = 1367
Cost of removal= 77
Total loss = 1444
New Machine:-
Cash paid(35700-20400) =15300
Fair value of old machine =20400
Installation = 1530
Total Cost =37230
Annual depreciation for June 1,2019
=(37230-4080)/10=$3,315