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Equipment was purchased for $305000. Freight charges amounted to $13700 and there was a cost of...

Equipment was purchased for $305000. Freight charges amounted to $13700 and there was a cost of $40400 for building a foundation and installing the equipment. It is estimated that the equipment will have a $59600 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be

$71820.
$50180.
$49080.
$59900
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Answer #1

When a fixed asset is purchased, all the costs required to make it ready to use are capitalized to the cost of the asset. Freight charges incurred to get the asset on the desired location and installation charges are capitalized to the cost of the asset as they are necessary for the asset to perform. Any repairs and maintenance in the subsequent periods are written off to the income statement as a revenue expense.

Total Cost of the Equipment

(A) Purchase Cost = 305000

(B) Freight Charges= 13700

(C) Installation Charges= 40400

Total Cost(A+B+C)= 359100

Depreciation under SLM= (Orginal Cost - Scrap Value)/Useful life

=(359100-59600)/5

= $ 59900

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