On January 1, 2014, Abraham Company purchased the following two machines for use in its production process.

Question:

On January 1, 2014, Abraham Company 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 $2,750, shipping costs $100, insurance during shipping $75, installation and testing costs $75, and $90 of oil and lubricants 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 salvage 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 salvage 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, 2014.
(2) The journal entry to record annual depreciation at December 31, 2014, 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: 2014, 4,700 units; 2015, 7,000 units; 2016, 8,000 units; 2017, 2,500 units; 2018, 1,800 units.
(c) Which method used to calculate depreciation on Machine B reports the lowest amount of depreciation expense in year 1 (2014)? The lowest amount in year 5 (2018)? The lowest total amount over the 5-year period?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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Related Book For  book-img-for-question

Financial and managerial accounting

ISBN: 978-1118016114

1st edition

Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso

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