Question

Exercise 11-08

Oriole Corporation bought a machine on June 1, 2018, for $37,200, f.o.b. the place of manufacture. Freight to the point where it was set up was $240, and $600 was expended to install it. The machine’s useful life was estimated at 10 years, with a salvage value of $3,000. On June 1, 2019, an essential part of the machine is replaced, at a cost of $2,376, 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, 2022, the company buys a new machine of greater capacity for $42,000, delivered, trading in the old machine which has a fair value and trade-in allowance of $24,000. To prepare the old machine for removal from the plant cost $90, and expenditures to install the new one were $1,800. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $4,800 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, 2022. (Round answer to 0 decimal places, e.g. 45,892.)

Depreciation for the year beginning June 1, 2022

Answer 1

Depreciation for the year beginning June 1, 2022

$3900

New machine
Basis of new machine	Cash paid ($42,000 – $24,000)	18000
	Fair value of old machine	24000
	Installation cost	1800
	Total cost of new machine	$43800

Depreciation for the year beginning June 1, 2022 = ($43800 – $4,800) ÷ 10 = $3,900.