Question

Check my work Frank Moran manages the cutting department of Greene Timber Company. He purchased a tree-cutting machine on January 1, 2018, for $510,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $105,000 per year. Technological developments resulted in the development of a more advanced machine available for purchase on January 1, 2019, that would allow a 25 percent reduction in operating costs. The new machine would cost $300,000 and have a 4-year useful life and zero salvage value. The current market value of the old machine on January 1, 2019, is $250,000, and its book value is $408.000 on that date. Straight-line depreciation is used for both machines. The company expects to generate $275,000 of revenue per year from the use of either machine. Required a. Recommend whether to replace the old machine on January 1, 2019. b. Prepare income statements for four years (2019 through 2022) assuming that the old machine is retained. c. Prepare income statements for four years (2019 through 2022) assuming that the old machine is replaced. Complete this question by entering your answers in the tabs below. Required A Required B Required C Recommend whether to replace the old machine on January 1, 2019. Replace With New Decision Keep Old Total avoidable costs Should the old machine be replaced on January 1, 2019? < Required A Required B >

Answer 1

Old Machine New Machine Calculation Method Formula Calculation Amount Amount (Cost - Residual Value)/ 510000/5 102,000 300000/4 Straight Line Annual Depreciation Useful Life $ $ 75,000 Loss on disposal BV MV 408000-250000 158000 Cost of replacement Cost on new machineLoss on sale 300000+158000 458000 Cost of replacement allocated to per year of new machine 458000/4 114500 Annual effect on cost Calculation Keep Old Replace with new A. Reduction in depreciation Reduction in operating cost Avoidance of replacement cost Total avoidable costs 102000-75000 27,000 105000*25% 26,250 114,500 114,500 53,250 The old machine should not be replaced becuase it will save only $53,250 per year however keeping the old machine will save $114,500 per year in terms of replacement cost 2022 Total 2019 2020 2021 Revenue 275,000 275,000 275,000 275,000 1,100,000 Less:Depreciation expense Less: Operating expense Net income (loss) 102,000 102,000 408,000 102,000 102,000 105,000 105,000 105,000 105,000 420,000 68,000 68,000 68,000 68,000 272,000 2019 2022 Total 2020 2021 Revenue Less:Depreciation expense Less: Operating expense 275,000 275,000 275,000 275,000 1,100,000 75,000 75,000 75,000 75,000 300,000 |(105000*75%) Less: Loss on disposal Net income (loss) 78,750 78,750 78,750 78,750 315,000 158,000 158,000 (36,750) 121,250 327,000 121,250 121,250