Sammy is in the doghouse business. He bought an automatic doghouse machine on Ja

Question

Sammy is in the doghouse business. He bought an automatic doghouse machine on January 1 for $10,000. He estimates it will last him for 10 years, after which it will be worthless. After five years, he wished he had bought the deluxe model which also puts on the roof. In order to buy the newer machine, he sells the first machine on December 31 of the 5th year for $3500.

1. Calculate the annual depreciation over the useful life of the machine using the straight line depreciation method. Set up a depreciation schedule.

2. Determine his income or loss from the sale of the old machine at the end of the 5th year.

3. What is the book value of the machine at the end of the 3rd year?

Explanation / Answer

Dep Using SLN method = Cost of Machine/Life = $10000/10 = $1000 pa So Annual Dep is $1000 .................Ans (1) 2. Book Value at end of Y5. Accum Dep at end of Y5 = 5*$1000 = $5000 So Book Value = Cost - Accum Dep = $10000 - $5000 = $5000 Sale proceed is $3500 So Loss on Sale = Sale value - BV = $3500 - $5000 = -$1500 ............Ans (2) 3. AT End of Y3, Accum Dep = 3*$1000 = $3000 So Book Value = Cost - Accu Dep = $10000-$3000 = $7000 ............Ans (3)

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