A manufacturer purchased a machine on 31 July 2014 for $44 500. The machine was
ID: 2563207 • Letter: A
Question
A manufacturer purchased a machine on 31 July 2014 for $44 500. The machine was installed and commissioned for use on 30 September 2014. The manufacturer paid $950 for the installation costs. Reducing balance method of depreciation at 8% p.a. was used. On 31 July 2016, the machine was traded in for $40 000 on a new machine costing $63 000. Straight line method at 20% p.a. was adopted for the new machine. Scrap value was $3000. The depreciation on the new machine for the year ended 30 June 2017 would be:
Explanation / Answer
Depreciation expense= Value to be depreciated *rate of depreciation
In the given case,
Value to be depreciated is the value at which old machine was traded in for obtaining new machine
Accordingly, let's calculate book value of old machine on the date of exchange
Cost of old machine (Including installation cost ) $44500+950= $ 45,450
Less: Depreciation for the year 2014-15 45,450*8% (3,636)
Book value as on 01.07.2015 $ 41,814
Less: Depreciation for the year 2015-16 41,814*8% (3,345)
Book value as on 01.07.2016 $ 38,469
Old machine of $38,469 was traded in for $40,000 new machine
So gain on old machine is 40,000-38,469=$1,531
Value to be depreciated for new machine is = 40,000-scrap value=40,000-3,000=37000
Depreciation per the year 2016-17 is 37000*20%=$ 7,400
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