George Zidek Corporation bought a machine on June 1, 2012, for $53,630, f.o.b. t

Question

George Zidek Corporation bought a machine on June 1, 2012, for $53,630, f.o.b. the place of manufacture. Freight to the point where it was set up was $346, and $865 was expended to install it. The machine’s useful life was estimated at 10 years, with a salvage value of $4,325. On June 1, 2013, an essential part of the machine is replaced, at a cost of $3,425, 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, 2016, the company buys a new machine of greater capacity for $60,550, delivered, trading in the old machine which has a fair value and trade-in allowance of $34,600. To prepare the old machine for removal from the plant cost $130, and expenditures to install the new one were $2,595. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $6,920 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, 2016. (Round answer to 0 decimal places, e.g. 45,892.)

What is depreciation for the year beginning June 1, 2016 $.............

Explanation / Answer

Solution:

Old Machine:

Annual depreciation charge = (54,841 - 4,325)/ 10 = 5,052

On June 1, 2013, debit the old machine for $3,425; the revised total cost is $58,266 ($54,841 + $3,425); thus the revised annual depreciation charge is: ($58,266 – $4,325 – $5,052) ÷ 9 = $5,432

New Machine:

Depreciation for the year beginning June 1, 2016 = (63,145 - 6,920)/ 10 = 5,623

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