During the current year, Benguet Company purchased a secondhand machine at a price of P300,000. A cash down payment of P50,000 was made and a two-year, non interest bearing note was issued for the balance. Recent transactions involving similar machinery indicate that the used machine has a secondhand market value of P240,000. A new machine would cost P400,000. The following costs were incurred on the machine during the year: Cost of removing the old machine 2,000 Cash proceeds form the sale of the old machine 1,200 Cost of spare parts purchased and set aside from breakdowns during the first two years of normal use of the machine 20,000 Cost of labor to install the machine 4,000 Cost of testing the machine prior to use 1,800 Cost of hauling the machine from the vendor’s place of business to the company’s premises 5,000 Cost of repairing the damage to the machine when it was dropped during the installation 3,000 Repairs incurred during the first year of operations 6,000 Safety devices added to the machine to comply with the terms of the collective bargaining agreement entered into with the employees’ union 12,000 Cost of training workers to operate the machine 1,500 Determine the amount to be capitalized as cost of the machine A . 292,800 B. 280,800 C. 272,800 D. 262,800
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.
During the current year, Benguet Company purchased a secondhand machine at a price of P300,000. A
cash down payment of P50,000 was made and a two-year, non interest bearing note was issued for the
balance. Recent transactions involving similar machinery indicate that the used machine has a secondhand
market value of P240,000. A new machine would cost P400,000. The following costs were incurred on the
machine during the year:
Cost of removing the old machine 2,000
Cash proceeds form the sale of the old machine 1,200
Cost of spare parts purchased and set aside from breakdowns during the first two years of
normal use of the machine 20,000
Cost of labor to install the machine 4,000
Cost of testing the machine prior to use 1,800
Cost of hauling the machine from the vendor’s place of business to the company’s premises 5,000
Cost of repairing the damage to the machine when it was dropped during the installation 3,000
Repairs incurred during the first year of operations 6,000
Safety devices added to the machine to comply with the terms of the collective bargaining
agreement entered into with the employees’ union 12,000
Cost of training workers to operate the machine 1,500
Determine the amount to be capitalized as cost of the machine
A
.
292,800 B. 280,800 C. 272,800 D. 262,800
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