RT Manufacturing is deciding whether to keep or replace an old machine. It obtains the following information: The information on various categories for an old machine and a new machine listed in the table is as follows: 1. Old Machine • Original cost: $10,800 • Useful life: 9 years • Current age: 4 years • Remaining useful life: 5 years • Accumulated depreciation: $4,800 • Book value: $6,000 • Current disposal value in cash: $2,800 • Terminal disposal value 5 years from now: $0 • Annual cash operating costs: $18,000 2. New Machine • Original cost: $8,800 • Useful life: 5 years • Current age: 0 years • Remaining useful life: 5 years • Accumulated depreciation: Not acquired yet • Book value: Not acquired yet • Current disposal value in cash: Not acquired yet • Terminal disposal value 5 years from now: $0 • Annual cash operating costs: $15,000 Old Machine New Machine Original cost $10,800 $8,800 Useful life 9 years 5 years Current age 4 years 0 years Remaining useful life 5 years 5 years Accumulated depreciation $4,800 Not acquired yet Book value $6,000 Not acquired yet Current disposal value (in cash) $2,800 Not acquired yet Terminal disposal value (5 years from now) $0 $0 Annual cash operating costs $18,000 $15,000 RT Manufacturing uses straight-line depreciation. Ignore the time value of money and income taxes.
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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RT Manufacturing is deciding whether to keep or replace an old machine. It obtains the following information:
The information on various categories for an old machine and a new machine listed in the table is as follows:
1. Old Machine
• Original cost: $10,800
• Useful life: 9 years
• Current age: 4 years
• Remaining useful life: 5 years
•
Accumulated depreciation : $4,800• Book value: $6,000
• Current disposal value in cash: $2,800
• Terminal disposal value 5 years from now: $0
• Annual cash operating costs: $18,000
2. New Machine
• Original cost: $8,800
• Useful life: 5 years
• Current age: 0 years
• Remaining useful life: 5 years
• Accumulated depreciation: Not acquired yet
• Book value: Not acquired yet
• Current disposal value in cash: Not acquired yet
• Terminal disposal value 5 years from now: $0
• Annual cash operating costs: $15,000
Old Machine New Machine Original cost $10,800 $8,800 Useful life 9 years 5 years Current age 4 years 0 years Remaining useful life 5 years 5 years Accumulated depreciation $4,800 Not acquired yet Book value $6,000 Not acquired yet Current disposal value (in cash) $2,800 Not acquired yet Terminal disposal value (5 years from now) $0 $0 Annual cash operating costs $18,000 $15,000
RT Manufacturing uses straight-line depreciation. Ignore the time value of money and income taxes.
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