Exercise 11-8 Ayayai Corporation bought a machine on June 1, 2015, for $33,480,

ID: 2576623 • Letter: E

Question

Exercise 11-8 Ayayai Corporation bought a machine on June 1, 2015, for $33,480, f.o.b. the place of manufacture. Freight to the point where it was set up was $216, and $540 was expended to install it. The machine's useful life was estimated at 10 years, with a salvage value of $2,700. On June 1, 2016, an essential part of the machine is replaced, at a cost of $2,138, 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 $37,800, delivered, trading in the old machine which has a fair value and trade-in allowance of $21,600. To prepare the old machine for removal from the plant cost $81, and expenditures to install the new one were $1,620. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $4,320 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

Solution:

Old Machine

June 1, 2015

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

$33,480

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

216

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

540

Total cost.........................................

$34,236

Annual depreciation charge: ($34,236 – $2,700) ÷ 10 = $3,154

On June 1, 2016, debit the old machine for $2,138; the revised total cost is $36,374 ($34,236 + $2,138); thus the revised annual depreciation charge is: ($36,374 – $2,700 – $3,154) ÷ 9 = $3,391.

Book value, old machine, June 1, 2019:

[$36,374 – $3,154 – ($3,391 X 3)] =........................................................

$23,074

Fair value....................................................................................................

(21,600)

Loss on exchange.......................................................................................

1,447

Cost of removal..........................................................................................

Total loss.........................................................................................

$ 1,528

New Machine

Basis of new machine

Cash paid ($37,800 – $21,600)

$16,200

Fair value of old machine

21,600

Installation cost

1,620

Total cost of new machine

$39,420

Depreciation for the year beginning June 1, 2019 = ($39,420 – $4,320) ÷ 10 = $3,510.