Norwel Company manufactures miniature circuit boards used in smartphones. On June 5, 2020, Norwel purchased a circuit board stamping machine at a retail price of $24,000. Norwel paid 5% sales tax on this purchase and hired a contractor to build a specially wired platform for the machine for $1,800, to meet OSHA safety requirements. Norwel estimates the machine will have a 5-year useful life, with a salvage value of $2,000 at the end of 5 years. Norwel uses straight-line depreciation and employs the “half-year” convention in accounting for partial-year depreciation. Norwel’s fiscal year ends on December 31. Instructions a. At what amount should Norwel record the acquisition cost of the machine? b. How much depreciation expense should Norwel record in 2020 and in 2021? c. At what amount will the machine be reported in Norwel’s balance sheet at December 31, 2021? d. During 2022, Norwel’s circuit board business is experiencing significant competition from companies with more advanced low-heat circuit boards. As a result, at June 30, 2022, Norwel conducts an impairment evaluation of the stamping machine purchased in 2020. Norwel determines that undiscounted future cash flows for the machine are estimated to be $15,200 and the fair value of the machine, based on prices in the re-sale market, to be $13,400. Prepare the journal entry to record an impairment, if any, on the stamping machine.
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.
Norwel Company manufactures miniature circuit boards used in smartphones. On June 5, 2020, Norwel purchased a circuit board stamping machine at a retail price of $24,000. Norwel paid 5% sales tax on this purchase and hired a contractor to build a specially wired platform for the machine for $1,800, to meet OSHA safety requirements. Norwel estimates the machine will have a 5-year useful life, with a salvage value of $2,000 at the end of 5 years. Norwel uses straight-line
Instructions
a. At what amount should Norwel record the acquisition cost of the machine?
b. How much depreciation expense should Norwel record in 2020 and in 2021?
c. At what amount will the machine be reported in Norwel’s
d. During 2022, Norwel’s circuit board business is experiencing significant competition from companies with more advanced low-heat circuit boards. As a result, at June 30, 2022, Norwel conducts an impairment evaluation of the stamping machine purchased in 2020. Norwel determines that undiscounted future
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