On January 1, 2017, Abraham SA purchased the following two machines for use in its production process. VI. Machine A: The cash price of this machine was €55,000. Related expenditures included: sales tax €3,300, shipping costs €325, insurance during ship- ping €75, installation and testing costs €1,300, and €90 of oil and lubri- cants to be used with the machinery during its first year of operation. Abraham estimates that the useful life of the machine is 4 years with a €6,000 residual value remaining at the end of that time period. Machine B: The recorded cost of this machine was €130,000. Abraham estimates that the useful life of the machine is 5 years with a €10,000 residual value remaining at the end of that time period. Instructions (a) Prepare the following for Machine A. (1) The journal entry to record its purchase on January 1, 2017. (2) The journal entry to record annual depreciation at December 31, 2017, assuming the straight-line method of depreciation is used. (b) Calculate the amount of depreciation expense that Abraham should record for Machine B each year of its useful life under the following assumption. (1) Abraham uses the straight-line method of depreciation. (2) Abraham uses the declining-balance method. The rate used is twice the straight- line rate. (3) Abraham uses the units-of-activity method and estimates the useful life of the machine is 24,000 units. Actual usage is as follows: 2017, 4,700 units; 2018, 8,200 units; 2019, 6,800 units; 2020, 2,500 units; and 2021, 1,800 units.
On January 1, 2017, Abraham SA purchased the following two machines for use in its production process. VI. Machine A: The cash price of this machine was €55,000. Related expenditures included: sales tax €3,300, shipping costs €325, insurance during ship- ping €75, installation and testing costs €1,300, and €90 of oil and lubri- cants to be used with the machinery during its first year of operation. Abraham estimates that the useful life of the machine is 4 years with a €6,000 residual value remaining at the end of that time period. Machine B: The recorded cost of this machine was €130,000. Abraham estimates that the useful life of the machine is 5 years with a €10,000 residual value remaining at the end of that time period. Instructions (a) Prepare the following for Machine A. (1) The journal entry to record its purchase on January 1, 2017. (2) The journal entry to record annual depreciation at December 31, 2017, assuming the straight-line method of depreciation is used. (b) Calculate the amount of depreciation expense that Abraham should record for Machine B each year of its useful life under the following assumption. (1) Abraham uses the straight-line method of depreciation. (2) Abraham uses the declining-balance method. The rate used is twice the straight- line rate. (3) Abraham uses the units-of-activity method and estimates the useful life of the machine is 24,000 units. Actual usage is as follows: 2017, 4,700 units; 2018, 8,200 units; 2019, 6,800 units; 2020, 2,500 units; and 2021, 1,800 units.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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Transcribed Image Text:VI.
On January 1, 2017, Abraham SA purchased the following two machines for use in
its production process.
Machine A: The cash price of this machine was €55,000. Related expenditures
included: sales tax €3,300, shipping costs €325, insurance during ship-
ping €75, installation and testing costs €1,300, and €90 of oil and lubri-
cants to be used with the machinery during its first year of operation.
Abraham estimates that the useful life of the machine is 4 years with a
€6,000 residual value remaining at the end of that time period.
Machine B: The recorded cost of this machine was €130,000. Abraham estimates that
the useful life of the machine is 5 years with a €10,000 residual value
remaining at the end of that time period.
Instructions
(a) Prepare the following for Machine A.
(1) The journal entry to record its purchase on January 1, 2017.
(2) The journal entry to record annual depreciation at December 31, 2017, assuming
the straight-line method of depreciation is used.
(b) Calculate the amount of depreciation expense that Abraham should record for Machine
B each year of its useful life under the following assumption.
(1) Abraham uses the straight-line method of depreciation.
(2) Abraham uses the declining-balance method. The rate used is twice the straight-
line rate.
(3) Abraham uses the units-of-activity method and estimates the useful life of the
machine is 24,000 units. Actual usage is as follows: 2017, 4,700 units; 2018, 8,200
units; 2019, 6,800 units; 2020, 2,500 units; and 2021, 1,800 units.
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