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(Depreciation Computation-Replacement, Nonmonetary Exchange) Goldman
Corporation bought a machine on June 1, 2008, for $31,800, f.o.b. the place of
manufacture. Freight to the point where it was set up was $200, and $500 was expected to
install it. The machines useful life was estimated at 10 years, with a salvage value of
$2,500. On June 1, 2009, an essential part of the machine is replaced, at a cost of $2,700,
with one designed to reduce the cost of operating the machine. The cost of the old part
and related depreciation cannot be determined with any accuracy. On June 1, 2012, the
company buys a new machine of greater capacity for $35,000, delivered, trading in the
old machine which has a fair market value and trade-in allowance of $20,000. To prepare
the old machine for removal from the plant cost $75, and expenditures to install the new
one were $1,500. It is estimated that the new machine has a useful life of 10 years, with a
salvage value of $4,000 at the end of the time. The exchange has commercial substance.
Assuming that depreciation is to be computed on the straight-line basis, compute the
annual depreciation on the new equipment that should be provided for the fiscal year
beginning June 1, 2012.
Old Machine
June 1, 2008
Purchase.........................................................
Freight ............................................................
Installation .....................................................
Total cost............................................
$31,800
200
500
$32,500
Annual depreciation charge: ($32,500 – $2,500) ÷ 10 = $3,000
On June 1, 2009, debit the old machine for $2,700; the revised total cost is
$35,200 ($32,500 + $2,700); thus the revised annual depreciation charge is:
($35,200 – $2,500 – $3,000) ÷ 9 = $3,300.
Book value, old machine, June 1, 2012:
[$35,200 – $3,000 – ($3,300 X 3)] = ..........................................................
Fair value ......................................................................................................
Loss on exchange .........................................................................................
Cost of removal ............................................................................................
$22,300
(20,000)
2,300
75
Total loss ...........................................................................................
New Machine
Basis of new machine
Cash paid ($35,000 – $20,000)
Fair value of old machine
Installation cost
Total cost of new machine
Depreciation for the year beginning June 1, 2012 = ($36,500 – $4,000) ÷ 10 = $3,250.
$ 2,375
$15,000
20,000
1,500
$36,500