d with a new one. The disposal le ($10,000 loss on disposal.) T placement, which of the follow
d with a new one. The disposal le ($10,000 loss on disposal.) T placement, which of the follow
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:A company's management team is considering replacing an old machine. It estimates that by keeping the
old machine, the related operating costs will be $1,200,000 but will drop to $750,000 a year if the old
machine is replaced with a new one. The disposal value of the old machine is $120,000, which is $10,000
below its book value ($10,000 loss on disposal.) The new machine will cost $520,000. Ignoring tax
implications of a replacement, which of the followings statements is correct?
Question 34 options:
Without consideration of nonfinancial factors, the old machine should be kept.
The $10,000 loss on disposal is relevant.
The difference in total costs between the two alternatives is $50,000.
The relevant cost savings is $40,000.
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