Adams Moran manages the cutting department of Greene Baird Company. He purchased a tree-cutting machine on January 1, year 2, for $360,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $91,000 per year. Technological developments resulted in the development of a more advanced machine available for purchase on January 1, year 3, that would allow a 25 percent reduction in operating costs. The new machine would cost $210,000 and have a 4-year useful life and zero salvage value. The current market value of the old machine on January 1, year 3, is $198,000, and its book value is $288,000 on that date. Straight-line depreciation is used for both machines. The company expects to generate $220,000 of revenue per year from the use of either machine. Required a. Recommend whether to replace the old machine on January 1, year 3. b. Prepare income statements for four years (year 3 through year 6) assuming that the old machine is retained. c. Prepare income statements for four years (year 3 through year 6) assuming that the old machine is replaced.

Adams Moran manages the cutting department of Greene Baird Company. He purchased a tree-cutting machine on January 1, year 2, for $360,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $91,000 per year. Technological developments resulted in the development of a more advanced machine available for purchase on January 1, year 3, that would allow a 25 percent reduction in operating costs. The new machine would cost $210,000 and have a 4-year useful life and zero salvage value. The current market value of the old machine on January 1, year 3, is $198,000, and its book value is $288,000 on that date. Straight-line depreciation is used for both machines. The company expects to generate $220,000 of revenue per year from the use of either machine. Required a. Recommend whether to replace the old machine on January 1, year 3. b. Prepare income statements for four years (year 3 through year 6) assuming that the old machine is retained. c. Prepare income statements for four years (year 3 through year 6) assuming that the old machine is replaced.

Name: Adams Moran manages the cutting department of Greene Baird Company. H
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Description: Adams Moran manages the cutting department of Greene Baird Company. He purchased a tree-cutting machine on January 1, year 2,for $360,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $91,

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Depreciation Methods

The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.

Depreciation Accounting

In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.

Topic Video

Question

Adams Moran manages the cutting department of Greene Baird Company. He purchased a tree-cutting machine on January 1, year 2,
for $360,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $91,000 per
year. Technological developments resulted in the development of a more advanced machine available for purchase on January 1, year
3, that would allow a 25 percent reduction in operating costs. The new machine would cost $210,000 and have a 4-year useful life and
zero salvage value. The current market value of the old machine on January 1, year 3, is $198,000, and its book value is $288,000 on
that date. Straight-line depreciation is used for both machines. The company expects to generate $220,000 of revenue per year from
the use of either machine.
Required
a. Recommend whether to replace the old machine on January 1, year 3.
b. Prepare income statements for four years (year 3 through year 6) assuming that the old machine is retained.
c. Prepare income statements for four years (year 3 through year 6) assuming that the old machine is replaced.
Answer is not complete.
Complete this question by entering your answers in the tabs below.
Required A
Required B
Required C
Prepare income statements for four years (year 3 through year 6) assuming that the old machine is replaced.
Year 3
Year 4
Year 5
Year 6
Total
Revenue
$ 220,000
$ 220,000
2$
220,000
$ 220,000
$ 880,000
Depreciation
52,500
52,500 O
52,500 O
52,500 O
210,000
expense
Operating expense
Loss on disposal
Net income (loss)
$ 167,500
$
167,500
$ 167,500
$
167,500
$ 670,000
< Required B
Required C >

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