Pearl Corporation bought a machine on June 1, 2015, for $33,170,
f.o.b. the place of manufacture. Freight to the point where it was
set up was $214, and $535 was expended to install it. The machine’s
useful life was estimated at 10 years, with a salvage value of
$2,675. On June 1, 2016, an essential part of the machine is
replaced, at a cost of $2,119, 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 $37,450, delivered, trading in the old machine which has a fair
value and trade-in allowance of $21,400. To prepare the old machine
for removal from the plant cost $80, and expenditures to install
the new one were $1,605. It is estimated that the new machine has a
useful life of 10 years, with a salvage value of $4,280 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 |
The cost of assets include costs for bringing it to use i.e. freight and installation to getting it ready for use.
When the business exchanges fixed assets with another and transaction has commercial substance, the business records the asset acquired at its fair value or fair value of assets given up, whichever is more readily available. When no commercial substance exists, the asset swap has no accounting impact as there is no significant change. However, this may result in profit and loss.
June 1, 2015 |
Purchase |
$ 33,160 |
Add: Freight |
214 |
|
Add: Installation |
535 |
|
Total cost |
$ 33,909 |
Annual depreciation charge: ($33,909 – $2,675) ÷ 10 = $3,123
On June 1,2016, the essential part of machine is replaced at $2119. This shall be added to the cost of machine as 33,909+2119 = $ 36,028 which will be revised cost.
Revised depreciation would be (36,028-3123-2675)/9 = 30230/9 = 3359
The machine is used for 3 years until latter swapped with asset which transaction has commercial substance.
Book value, old machine, June 1, 2019: |
|
[$36,028 – $3,123 – ($3,359 X 3)] |
$ 22,828 |
Fair value |
(21,400) |
Loss on exchange |
1428 |
Cost of removal |
80 |
Total loss |
1508 |
New Machine
Basis of new machine |
Cash paid ($37,450 – $21,400) |
16,050 |
Fair value of old machine |
21,400 |
|
Installation cost |
1,605 |
|
Total cost of new machine |
$ 39,055 |
Depreciation for the year beginning June 1, 2019 = ($39,055 – $4,280) ÷ 10 = $ 3478.
kindly upvote
Pearl Corporation bought a machine on June 1, 2015, for $33,170, f.o.b. the place of manufacture....
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