Question

LO1. How does a business measure the cost of property, plant and equipment a) List three examples of items paid to the purchaser that is part of the total cost of land? ii) b) A piece of machinery equipment has a purchase price of $10,000. We also paid $1,000 commission, $1,200 for sales tax, and $300 for repair work from damaged when unloading. What is the amount to be debited to the Equipment account? LO2. What is depreciation and how is it computed a) Use the following information regarding a piece of equipment to answer the following questions: Cost of machine is $20,000 Useful life is 4 years or 15,000 machine hours Residual value is $5,000 1) What is the depreciation expense for the first year using the straight-line method? ii) Assume the equipment was used 3,000 hour the first year of operations. What is the depreciation expense for the first year based on machine hours using the units of production method? iii) What is the deprecation expense for the first year using the double-declining-method?

Answer 1

Q1. a) Three examples of items paid to the purchaser that is part of the total cost of Land:-

i) Purchase price of Land or Acquisition cost

ii) Any extra improvements are done by the seller on Land

iii) Title transfer fees

b) The purchase price, commission, and repair work from damage when unloading has to be debited to the Equipment account. ( Assuming sales tax is the deductible expense from output sales tax ) . So, $ 10,000 + $ 1,000 + $300 = $11,400 will be debited to equipment account.

Q2. a) i) Depreciation expense for the first year using the straight-line method

( Cost of Machine - Residual Value ) / Useful life = ( $20,000 - $5,000 ) / 4 years = $ 3,750

a) ii) Depreciation based on machine hours using the units of production method

( Actual no. of machine hours used / Total Machine hours ) $\times$ Cost of Machine = ( 3000 / 15000 ) $\times$ $ 20,000 = $4,000

a) iii) Depreciation using double declining method

This method uses the double rate of SLM = 2 $\times$ [Depreciation for the first year / Net cost of Machine ] $\times$ 100

2 $\times$ [($ 3,750 / $ 15,000) $\times$ 100 ]= 50%

***Net cost of machine = Cost of Machine - Residual value

So, Depreciation using double declining method = 50% $\times$ $ 20,000 = $ 10,000