Baird Moran manages the cutting department of Greene Benson Company. He purchased a tree-cutting machine on January 1, Year 2, for $370,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $85,000 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 20 percent reduction in operating costs. The new machine would cost $198,000 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 $210,000, and its book value is $296,000 on that date. Straight-line depreciation is used for both machines. The company expects to generate $240,000 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. Complete this question by entering your answers in the tabs below. X Answer is not complete. Required A Required B Recommend whether to replace the old machine on January 1, Year 3. Replace With New Required C Decision Keep Old 580,000 Total avoidable costs S Should the old machine be replaced on January 1, Year 3? < Required A S Yes 470.000✔ Required B >
Baird Moran manages the cutting department of Greene Benson Company. He purchased a tree-cutting machine on January 1, Year 2, for $370,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $85,000 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 20 percent reduction in operating costs. The new machine would cost $198,000 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 $210,000, and its book value is $296,000 on that date. Straight-line depreciation is used for both machines. The company expects to generate $240,000 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. Complete this question by entering your answers in the tabs below. X Answer is not complete. Required A Required B Recommend whether to replace the old machine on January 1, Year 3. Replace With New Required C Decision Keep Old 580,000 Total avoidable costs S Should the old machine be replaced on January 1, Year 3? < Required A S Yes 470.000✔ Required B >
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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.
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Transcribed Image Text:Baird Moran manages the cutting department of Greene Benson Company. He purchased a tree-cutting machine on January 1, Year 2,
for $370,000. The machine had an estimated useful life of 5 years and zero salvage value, and the cost to operate it is $85,000 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 20 percent reduction in operating costs. The new machine would cost $198,000 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 $210,000, and Its book value is $296,000 on
that date. Straight-line depreciation is used for both machines. The company expects to generate $240,000 of revenue per year from
the use of elther 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.
Complete this question by entering your answers in the tabs below.
Required A
Required B
Required C
Decision
Answer is not complete.
Recommend whether to replace the old machine on January 1, Year 3.
Replace With
New
Keep Old
Total avoidable costs
s
580,000
Should the old machine be replaced on January 1, Year 3?
< Required A
$
Yes
470.000 ✓
Required B >
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