Tamarisk Corporation bought a machine on June 1, 2015, for $36,270, f.o.b. the p

ID: 2587954 • Letter: T

Question

Tamarisk Corporation bought a machine on June 1, 2015, for $36,270, f.o.b. the place of manufacture. Freight to the point where it was set up was $234, and $585 was expended to install it. The machine’s useful life was estimated at 10 years, with a salvage value of $2,925. On June 1, 2016, an essential part of the machine is replaced, at a cost of $2,317, 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, 2019, the company buys a new machine of greater capacity for $40,950, delivered, trading in the old machine which has a fair value and trade-in allowance of $23,400. To prepare the old machine for removal from the plant cost $88, and expenditures to install the new one were $1,755. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $4,680 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, 2019. (Round answer to 0 decimal places, e.g. 45,892.)

Depreciation for the year beginning June 1, 2019

Explanation / Answer

Old Machine

June 1, 2015

Purchase......................................................

$36270

Freight.........................................................

234

Installation...................................................

585

$37089 (TOTAL COST)

Annual depreciation charge: ($37089– $2925) ÷ 10 = $3416

On June 1, 2016, debit the old machine for $2,317; the revised total cost is=

$39406 ($37089+ $2317); thus the revised annual depreciation charge is: ($39406 – $2,925 – $3,416) ÷ 9 = $3674.

Book value, old machine, June 1 2019;

[$39406 – $3,416 – ($3,674 X 3)]= ----------------------------------------------------- $24968

Fair value ------------------------------------------------------------------------------------ ($23400)

-----------------

Loss on exchange $1568

Cost of removal ----------------------------------------------------------------- $88

-------------

Total loss------------------------------------------------------- $1656

New Machine

Basis of new machine Cash paid ($40950 – $23400)------------ $17550

Fair value of old machine -------------- $23400

Installation cost ------------------------ $1755

--------------

Total cost of new machine $42705

Depreciation for the year beginning June 1, 2019 = ($42705 – $4680) ÷ 10 = $3803