Question

Brown Company paid cash to purchase the assets of Coffee Company on January 1, 2019. Information is as follows: Total cash paid $2,990,000 Assets acquired: Land $600,000 Building $600,000 Machinery $500,000 Patents $600,000 The building is depreciated using the double-declining balance method. Other information is: Salvage value $60,000 Estimated useful life in years 30 The machinery is depreciated using the units-of-production method. Other information is: Salvage value, percentage of cost 10% Estimated total production output in units 400,000 Actual production in units was as follows: 2019: 40,000 2020: 80,000 2021: 120,000 The patents are amortized on a straight-line basis. They have no salvage value. Estimated useful life of patents in years 20 On December 31, 2020, the value of the patents was estimated to be $900,000 Where applicable, the company uses the ½ year rule to calculate depreciation and amortization expense in the years of acquisition and disposal. Its fiscal year-end is December 31. The machinery was traded on December 2, 2021 for new machinery. Other information is: Fair value of old machinery $240,000 Trade-in allowance $336,000 List price for new machinery $504,000 Estimated useful life of new machinery in years 20 Estimated salvage value of new machinery $15,120 The new machinery if depreciated using the straight-line method and ½ year rule. On August 14, 2023, an addition was made. This amount was material. Other relevant information is as follows: Amount of addition, paid in cash $100,000 Number of years of useful life from 2023 (original machinery and addition): 20 Salvage value, percentage of addition 10%

Please solve this question: Depreciation on the new machinery for 2021.

Answer 1

Under 1/2 year rule of depreciation it is consider that all property purchase/acquired during the year as being acquired/purchase exactly middle of the year i.e. only half of the depreciation of full year is allow in the first year and remaining balance to be deducted at the end of life or the year of the asset sold.

Hence , new machinery has purchased on 2, December 2021 ,of $504,000 , life of Machinery is 20 and salvage value $15,120.

Hence Depreciation of new machinery under straight line and 1/2 year rule =( (Cost of machinery -Salvage)/20)/2

=(( $504,000-$15,120)/20)/2

= $12,222.