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Chapter 11: Q11-5BE (page 584)

Cominsky Company purchased a machine on July 1, 2018, for \(28,000. Cominsky paid \)200 in title fees and county property tax of \(125 on the machine. In addition, Cominsky paid \)500 shipping charges for delivery, and \(475 was paid to a local contractor to build and wire a platform for the machine on the plant floor. The machine has an estimated useful life of 6 years with a salvage value of \)3,000. Determine the depreciation base of Cominsky’s new machine. Cominsky uses straightline depreciation.

Short Answer

Expert verified

Answer

Depreciation base is $26,300.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Depreciation

Depreciation can be stated as a decline in the value of an asset over a useful period. All assets depreciate over time, except for land, whose value increases with the passage of time. Among various methods of depreciation, straight-line depreciation is considered to be the simplest and error-free method.

02

Determining the depreciation base of Cominsky’s new machine

Cost of machine

$28,000

Add: Title fees

$200

Property tax

$125

Shipping charges

$500

Paid to contractor

$475

$29,300

Less: Salvage value

$3,000

Depreciation base

$26,300

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Most popular questions from this chapter

(Impairment) Roland Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for \(10,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2017, new technology was introduced that would accelerate the obsolescence of Roland’s equipment. Roland’s controller estimates that expected future net cash flows on the equipment will be \)6,300,000 and that the fair value of the equipment is \(5,600,000. Roland intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Roland uses straight-line depreciation.

Instructions

  1. Prepare the journal entry (if any) to record the impairment at December 31, 2017.
  2. Prepare any journal entries for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2018, is estimated to be \)5,900,000.
  3. Repeat the requirements for (a) and (b), assuming that Roland intends to dispose of the equipment and that it has not been disposed of as of December 31, 2018.

Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.

For what reasons are plant assets retired? Define inadequacy, supersession, and obsolescence.

Workman Company purchased a machine on January 2, 2017, for \(800,000. The machine has an estimated useful life of 5 years and a salvage value of \)100,000. Depreciation was computed by the 150% declining-balance method. What is the amount of accumulated depreciation at the end of December 31, 2018?

(Depreciation—Conceptual Understanding) Rembrandt Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the years’-digits method, and (3) the double-declining-balance method.

Year

Straight-Line

Sum-of-the Years’-Digits

Double-Declining Balance

1

\( 9,000

\) 15,000

\(20,000

2

9,000

12,000

12,000

3

9,000

9,000

7,200

4

9,000

6,000

4,320

5

9,000

3,000

1,480

Total

\)45,000

\(45,000

\)45,000

Instructions

Answer the following questions.

  1. What is the cost of the asset being depreciated?
  2. What amount, if any, was used in the depreciation calculations for the salvage value for this asset?
  3. Which method will produce the highest charge to income in Year 1?
  4. Which method will produce the highest charge to income in Year 4?
  5. Which method will produce the highest book value for the asset at the end of Year 3?
  6. If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?
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