P3-6) A company purchased a machine for $10,000,000 on January 1, 2013. The mach
ID: 2427893 • Letter: P
Question
P3-6) A company purchased a machine for $10,000,000 on January 1, 2013. The machine has a to-year estimated useful life and an estimated residual value of $1,000,000. The company uses the straight-line depreciation method. During 2014, the company experiences significant and unexpected financial difficulty such that it goes into bankruptcy on December 31, 2014. At this time, the machine has a resale value in an auction for $5,500,000.
a) How much is depreciation expense for 2013 and 2014?
b) Should depreciation expense or 2014 be the same as for 2013? Why?
c) What should be the value of the machine on the balance sheet on December 31, 2014?
d) What should be the adjustment to the carrying value of the machine in 2014?
Explanation / Answer
a) cost of machine = $10000000
residual value = 1000000
life = 2 years
Depreciation as per SLM = (cost - salvage value) / life
Depreciation expense for 2013 = (10000000 - 1000000)/2 = 4500000
Depreciation expense for 2014 = (10000000 - 1000000)/2 = 4500000
b) yes, as per SLM method depreciation expense would charged on the original cost of asset each year, hence it is same in each year
c) the value of the machine on the balance sheet on December 31, 2014 = 0
d) carrying value for 2014 = $5500000, machine would be recorded at carrying value
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.