Question

Crane Corporation bought a machine on June 1, 2015, for $36,890, f.o.b. the place of manufacture. Freight to the point where it was set up was $238, and $595 was expended to install it. The machine’s useful life was estimated at 10 years, with a salvage value of $2,975. On June 1, 2016, an essential part of the machine is replaced, at a cost of $2,356, with one designed to reduce the cost of operating the machine. The cost of the old part and related depreciation cannot be determined with any accuracy.

On June 1, 2019, the company buys a new machine of greater capacity for $41,650, delivered, trading in the old machine which has a fair value and trade-in allowance of $23,800. To prepare the old machine for removal from the plant cost $89, and expenditures to install the new one were $1,785. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $4,760 at the end of that time. (The exchange has commercial substance.)

Assuming that depreciation is to be computed on the straight-line basis, compute the annual depreciation on the new equipment that should be provided for the fiscal year beginning June 1, 2019. (Round answer to 0 decimal places, e.g. 45,892.)

Answer 1

In case of asset exchange, the asset purchase is required to be recorded at fair value, which will be calculated as the cash consideration paid plus fair value of the asset given up. Therefore, in this case, value of the new asset and the related annual depreciation will be calculated as follows:

USD 89 for dismantling old machine will be charged to the profit and loss account. For computation of depreciation of new machine, the book value of the old machine is not relevant and therefore, not taken into consideration or computed. The book value of the old machine will be derecognised. Difference between book value and fair value, i.e. 23,800 will be recorded as gain/loss on disposal, as the case may be