Question

On January 1, 2017, Evers Company purchased the following two machines for use in its production process. Machine A: The cash price of this machine was $52,000. Related expenditures included: sales tax $3,100, shipping costs $200, insurance during shipping $120, installation and testing costs $50, and $150 of oil and lubricants to be used with the machinery during its first year of operations. Evers estimates that the useful life of the machine is 5 years with a $5,500 salvage value remaining at the end of that time period. Assume that the straight-line method of depreciation is used. Machine B: The recorded cost of this machine was $180,000. Evers estimates that the useful life of the machine is 4 years with a $10,200 salvage value remaining at the end of that time period.

Answer 1

• Under Straight Line Method of depreciation, annual depreciation is calculated as follow:

[ Cost of Asset capitalised (less) Salvage Value ] / Useful life in years

• Machine A

All costs till installation of assets are capitalised unless they are refundable.

Cash Price	52000	capitalized
Sales Tax	3100	capitalized
Shipping cost	200	capitalized
Insurance	120	capitalized
Installation cost	50	capitalized
Oil	150	Not capitalized
Total Cost of Asset capitalized	55470
Salvage Value	5500
Useful Life	5
Annual SLM depreciation	9994	[55470-5500]/5

• Machine B

Total Cost of Asset capitalized	180000
Salvage Value	10200
Useful Life	4
Annual SLM depreciation [180000-10200]/4	42450