Question

A company called Hands Up located in Texas manufactures latex gloves used in the medical industry. Hands Up purchased a new machine that will enable them to make gloves in various colors. It was purchased on April 1, 2004 for $210,000. Even though the machine was assembled in Chicago, Hands Up was required by the state of Texas to pay Texas sales tax of $14,220 because the Chicago company also had operations in Texas. Hands Up was required to pay $7,200 to have the machine transported to Texas. Upon arrival a specialized crew had to install the new machine at a cost of $4,440. The machine was fully operational by April 12, 2004. The machine’s technology is actually two years old, and the market value in 2002 was $225,000. Hands Up estimates the useful life of the asset to be 10 years. The estimated value of the machine at its replacement time is determined by Hands Up to be $54,000. Hands Up uses the straight-line method for depreciation of machinery. It is company policy to prepare adjusting entries only at the end of the fiscal year, which is December 31.

If the machine had been purchased and placed into operation on August 1, 2004, what would be the amount of the adjusting entry for depreciation in the final year?

Answer 1

Cost of machinery (Cost plus capital expenditure)

= 210,000+14,220+7,200+4,440

= 235,860

Yearly Depreciation as per straight line method

= {Cost - Salvage value} / No of years

= 235,860 - 54,000 / 10

= 18,186

If the machine had been purchased and placed into operation on August 1, 2004, the amount of the adjusting entry for depreciation in the final year will be

= 18,186 * 7months/12months

= $10,608.50

Note: 7 months since in the last year, the machine will be used till 31st of July.