Case A. Kapono Farms exchanged an old tractor for a newer model. The old tractor
ID: 2446715 • Letter: C
Question
Case A. Kapono Farms exchanged an old tractor for a newer model. The old tractor had a book value of $12,000 (original cost of $28,000 less accumulated depreciation of $16,000) and a fair value of $9,000. Kapono paid $20,000 cash to complete the exchange. The exchange has commercial substance. 1. Useful life is 7 years, no salvage life. Left 3 years. 2. Create depreciation table SL then use similar for different depreciation. Use function to calculate depreciation. Create chart for depreciation and compare between more than one method of depreciation in one chart. Depreciation Table Straight line Years: Depreciation : Accumulated depreciation: 3. Comment about your answer If he has to use the old equipment or should exchange or keep old one ?
Explanation / Answer
While taking decision on replacement of an asset, unamortised cost of the old asset is not a relevant factor for decision making. The decision is not depend upon amount of depreciation taken for old asset. It is depend upon efficiency of assets which is under question for replacement. The following factors are relevant for the purpose of replacement of an asset.
(‘1) – Relative efficiency of new assets compare to assets in use
(‘2) Availability of capital for new asset
Loss on old Machine to be reported
Original Cost
28,0000
Less: Accumulated Depreciation
16,0000
Book Value
12,000
Fair Market Value
9,000
Loss on Exchange
3,000
New Machine-
Cash Paid
20,000
Add : Fair Market Value of old asset
9,000
Total Cost of Machine
29,000
Useful Life
7 Years
Salavge Value
0
Depreciable Base ( Total cost – Salvage value )
29,000
Annual Depreciation (29,000/7)
4142.85
Depreciation Chart
Year
Depreciation Expense
1
4142.86
2
4142.86
3
4142.86
4
4142.86
5
4142.86
6
4142.86
7
4142.86
Following function is used in the spread sheet to calculate depreciation-
=SLN(cost, salvage value, life)
Other methods of depreciation-
There are other methods also for recording depreciation-
Unit of Production Method- The asset is depreciated each year according to the number of units produced.
The Accelerated Method- There are two methods in accelerated method.
(‘a) Declining Balance Method-
(‘b) Sum of the years digit method-
As required data is not available to calculate the depreciation under other method hence only depreciation is calculated under straight line method.
Original Cost
28,0000
Less: Accumulated Depreciation
16,0000
Book Value
12,000
Fair Market Value
9,000
Loss on Exchange
3,000
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