Payne Company purchased equipment on account on September 3, 2022, at an invoice price of $210,000. On September 4, 2022, it paid $4,400 for delivery of the equipment. A one-year, $1,975 insurance policy on the equipment was purchased on September
Payne Company purchased equipment on account on September 3, 2022, at an invoice price of $210,000. On September 4, 2022, it paid $4,400 for delivery of the equipment. A one-year, $1,975 insurance policy on the equipment was purchased on September 6, 2022. On September 20, 2022, Payne paid $5,600 for installation and testing of the equipment. The equipment was ready for use on October 1, 2022.
Payne estimates that the equipment’s useful life will be four years, with a residual value of $15,000. It also estimates that, in terms of activity, the equipment’s useful life will be 82,000 units. Payne has a September 30 fiscal year end. Assume that actual usage is as follows:
a. Determine the cost of the equipment.
b. Prepare depreciation schedules for the life of the asset under the following depreciation methods:
2. Double diminishing-balance, assuming a rate of 50%
c. Which method would result in the highest profit for the year ended September 30, 2024? Over the life of the asset?
# of Units 16,750 27,600 22,200 16,350 Year Ended September 30 2023 2024 2025 2026
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a. The $1,975 insurance policy is an annual operating expenditure and not included in the …View the full answer
Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.
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