On January 1, 2012, Pele Company purchased the following two machines for use in

Question

On January 1, 2012, Pele Company purchased the following two machines for use in its production process.
Machine A The cash price of this machine was $38,000. Related expenditures included: sales tax $1,700, shipping costs $150, insurance during shipping $80, installation and testing costs $70, and $100 of oil and lubricants to be used with the machinery during its first year of operations. Pele estimates that the useful life of the machine is 5 years with a $5,000 salvage value remaining at the end of that time period. Assume that the straight-line method of depreciation is used.
Machine B The recorded cost of this machine was $160,000. Pele estimates that the useful life of the machine is 4 years with a $10,000 salvage value remaining at the end of that time period.




Prepare the following for Machine A.
The journal entry to record its purchase on January 1, 2012.
The journal entry to record annual depreciation at December 31, 2012.
Date Account/Description Debit Credit

Jan. 1

Dec. 31

Explanation / Answer

Prepare the following for Machine A. The journal entry to record its purchase on January 1, 2008. Dr Machine A 40,000 Cr Cash 40,000 The journal entry to record annual depreciation at December 31, 2008. Dr Depreciation Expense, Machine A 7,000 Cr Accumulated Depreciation, Machine A 7,000 calculate the amount of depreciation expense that should record for machine B each year of its useful life under the following assumptions. Pele uses the straight-line method of depreciation. (160,000 - 10,000) / 4 = 37,500 Pele uses the declining-balance method. The rate used is twice the straight-line rate. Year 1: 160,000 x 50% = 80,000 Depreciation expense. New book value, 80,000 Year 2: 80,000 x 50% = 40,000 Depreciation expense. New book value, 40,000 Year 3: 40,000 x 50% = 20,000 Depreciation expense. New book value, 20,000 Year 4 20,000 x 50% = 10,000 Depreciation expense. Pele uses the units-of-activity method and estimates that the useful life of the machine is 125,000 units. Actual usage is as follows: 2008, 45,000 units; 2009, 35,000 units; 2010, 25,000 units; 2011, 20,000 units. (160,000 - 10,000) / 125,000 = 1.20 per unit Year 1: 45,000 x 1.20 = 54,000 Depreciation Expense Year 2: 35,000 x 1.20 = 42,000 Depreciation Expense Year 3: 25,000 x 1.20 = 30.000 Depreciation Expense Year 4: 20,000 x 1.20 = 24,000 Depreciation Expense Which method used to calculate depreciation on machine B reports the highest amount of depreciation expense in year 1 (2008)? The highest amount in year 4 (2011)? The highest total amount over the 4-year period? Year 1: Declining balance Year 4: Straight-line They each record the same amount of depreciation over the 4-year period (150,000).

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