On January 1, 2011, Newtown Propane Incorporated acquired a new piece of machine

Question

On January 1, 2011, Newtown Propane Incorporated acquired a new piece of machinery and a used truck from Acme Equipment Company. Newtown Propane negotiated a price of $125,000 for both items. The fair market value of the equipment was $108,000, and the fair market value of the truck was $42,000. Newtown Propane Incorporated signed a note with Acme to make the purchase.

The machine purchased by Newtown Propane Incorporated (see journal entry above) is expected to have a useful life of four years. At the end of its useful life, the salvage value of the machine is estimated to be $4,000. Newtown Propane Incorporated's fiscal year ends each December 31. The company has elected to depreciate the machine using the declining balance method at two times the straight-line rate.

Using the data above, calculate the depreciation rate for the machine: Depreciation Rate Complete the table below: Declining Balance Method Depreciation Accumulated Year depreciation expense 2011 2012 2013 2014 Book value

Explanation / Answer

Purchase value shall be taken as follows:

Cost of the new machine will be = 125,000* 108,000/(108,000+42,000)

= 90,000

Salvage value at the end of 4 th year = 4,000

Calculation of depreciation:

Year Depreciation
Exp Accumulated
Depreciation Book value 2011 45000 45000 45000 2012 22500 67500 22500 2013 11250 78750 11250 2014 7250 86000 4000 (Balancing Figure)

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