Determine the carrying amounts for Machine Z to be reported on the balance sheet at the end of Years 1–5, and the amounts to be reported in the income statement related to Machine Z for Years 1–5.
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.
Buch Corporation purchased Machine Z at the beginning of Year 1 at a cost of $100,000. The machine is used in the production of Product X. The machine is expected to have a useful life of 10 years and no residual value. The straightline method of
|
Expected future cash flow |
$75,000 |
|
Present value of expected future |
$55,000 |
|
Selling price |
$70,000 |
|
Costs of disposal |
$7,000 |
At the end of Year 5, Buch’s management determines that there has been a substantial improvement in economic conditions resulting in a strengthening of demand for Product X. The following estimates related to Machine Z are developed at December 31, Year 5:
|
Expected future cash flow |
$70,000 |
|
Present value of expected future cash flows |
$53,000 |
|
Selling price |
$50,000 |
|
Costs of disposal |
$7,000 |
Required:
Determine the carrying amounts for Machine Z to be reported on the
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
