Question

On September 1, 2011, a company purchased a weaving machine for $239,800. The machine has an estimated useful life of 8 years and an estimated residual value of $17,800. Additionally, it is estimated that the machine would produce 740,000 bolts of woven fabric over its useful life. The company ended up selling the machine in 2018 after 1 month of use. The following budgeted and actual activity levels were provided to support your work: Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 Budgeted Bolts Budgeted cumulative 20,000 20,000 100,000 120,000 100,000 220,000 100,000 320,000 100,000 420,000 85,000 505,000 85,000 590,000 85,000 675,000 65.000 740,000 Actual Bolts actual cumulative 35,000 35,000 115,000 150,000 116,000 266,000 119,000 385,000 120,000 505,000 117,000 622,000 112,000 734.000 9,000 743,000 na

Answer 1

Depreciation rate per unit = (Cost - Estimated residual value) / Total estimated production units = (239,800 - 17,800) / 740,000 = $0.3 Accumulated Depreciation till the date of disposal = Cumulative number of units produced * Depreciation rate per unit = 743,000 * 0.3 = $222,900 Book value of equipment at the time of disposal = Cost - Accumulated depreciation = 239,800 - 222,900 = $16,900 < Estimated residual value Book value of equipment cannot be below it's estimated residual value. Therefore, book value of equipment at the time of disposal = $17,800 & Accumulated depreciation till the date of disposal = 239,800 - 17,800 = $222,000 Selling price of equipment = $18,200 > Book value of equipment at the time of disposal Therefore, the company records a gain on disposal. Gain on disposal = 18,200 - 17,800 = $400 Answer: (a)