Question

During Year 1, Ashkar Company ordered a machine on January 1 at an invoice price of $30,000. On the date of delivery, January 2, the company paid $5,000 on the machine, with the balance on credit at 10 percent interest due in six months. On January 3, it paid $800 for freight on the machine. On January 5, Ashkar paid installation costs relating to the machine amounting to $2,600. On July 1, the company paid the balance due on the machine plus the interest. On December 31 (the end of the accounting period), Ashkar recorded depreciation on the machine using the straight-line method with an estimated useful life of 10 years and an estimated residual value of $3,400.

1) compute the dpreciation expense to be reported Year 1

2) What would be the net book value of the machine at the end of Year 2? (show your work)

Answer 1

Solution

Ashkar Company

1. Computation of depreciation expense to be reported Year 1:

Straight line method –

Depreciation expense = depreciable base x 1/useful life

Depreciable base = cost – residual value

Cost –

Invoice price$30,000

Freight cost$800

Installation cost$2,600

Cost of machine$33,400

Residual value = $3,400

Depreciable base = $33,400 - $3,400 = $30,000

Useful life = 10 years

Depreciation expense for Year 1 = $30,000 x 1/10

= $3,000

1. Computation of net book value of the machine at the end of Year 2:

Net book value = cost – accumulated depreciation

Since depreciation expense under the straight line method would remain constant throughout the useful life of the asset, the annual depreciation expense = $3,000 for Year 1 and Year 2.

Accumulated depreciation at end of Year 2 = $3,000 + $3,000 = $6,000

Net book value at end of Year 2 = $33,400 - $6,000 = $27,400