8. (5 points) On 01-01-15, G purchased a machine for $15,000,000. Installation c

Question

8. (5 points) On 01-01-15, G purchased a machine for $15,000,000. Installation costs incurred and paid for on 01-01-15 were $10,000. G started using the machine on 01-01-15. G estimates it will use the machine for 5 years. At the end of the 5th year, G will have to dispose of the machine at an estimated cost of $1,250,000. Assume as of 01-01-15 the interest rate on US Treasury securities was 0.75% and G’s credit standing required a 2.25% risk premium. G uses a sum-of-the years digits depreciation method and assumes no salvage value.

a. What amount should G report on its balance sheet as a fixed asset (machine) as of 12-31-15?

b. Prepare an excel spreadsheet that clearly identifies and clearly labels G’s ARO obligation balance as of 12-31 for every year from 2015 to 2019 AND G’s accretion expense for every year for 2015 to 2019.

c. Prepare the entries G should make related to the equipment and its ARO for the year ended 12-31-16 AND 12-31-18?

d. What amount should G report on its balance sheet as its ARO as of 12-31-17?

Explanation / Answer

a.

b.

C.

d. Amount to be reported= 1178244.89

Year Fraction Cost less salvage Depreciation a b c d e= d* b/c 2015 5 / 15 1510000     5,03,333.33 2016 4 / 15 1510000     4,02,666.67 2017 3 / 15 1510000     3,02,000.00 2018 2 / 15 1510000     2,01,333.33 2019 1 / 15 1510000     1,00,666.67

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