Question

At the beginning of the year, Young Company bought three used machines from Vince, Inc. The machines immediately were overhauled, were installed, and started operating. Because the machines were different, each was recorded separately in the accounts.

	Machine A			Machine B			Machine C
Amount paid for asset	$	8,150		$	26,700		$	10,400
Installation costs		450			850			750
Renovation costs prior to use		2,600			1,250			1,450
Repairs after production began		510			460			600

By the end of the first year, each machine had been operating 6,000 hours.

Required:

1. Compute the cost of each machine.
2. Prepare the journal entry to record depreciation expense at the end of year 1, assuming the following: TIP: Remember that the formula for double-declining-balance uses cost minus accumulated depreciation (not residual value).

	Estimates
Machine	Life		Residual Value				Depreciation Method
A	5	years		$	600		Straight-line
B	20,000	hours			600		Units-of-production
C	6	years			1,800		Double-declining-balance

Answer 1

1	Cost of the machines
	Particulars	Machine A ($)	Machine B ($)	Machine C ($)
	Amount paid for asset	8150	26700	10400
	Add: Installation costs	450	850	750
	Add: Renovation costs	2600	1250	1450
	Cost of the machine	11200	28800	12600

Note: The repair costs incurred after the production, are expenses incurred after the asset is put to use. Those repair expenses cannot be capitalised unless they result in economic benefits more than the initial estimation. Hence, they are not considered

2	Depreciation
	Machine A
	Method	Straight line
	Cost of the machine	11200
	Salvage value	600
	Useful life	5 years
	Depreciation = (Cost - Residual value) / Useful life = (11200-600)/5	2120
	Entry:
	Particulars	Debit ($)	Credit ($)
	Depreciation expense	2120
	Accumulated depreciation - Machine A		2120
	To record depreciation for year 1
	Machine B
	Method	Units-of-production
	Cost of the machine	28800
	Estimated number of hours	20000
	Actual operating hours in Year 1	6000
	Depreciation = Cost *(Actual hours/Estimated hours) = 28800*(6000/20000)	8640
	Entry:
	Particulars	Debit ($)	Credit ($)
	Depreciation expense	8640
	Accumulated depreciation - Machine B		8640
	To record depreciation for year 1
	Machine C
	Method	Double declining balance
	Cost of the machine	12600
	Salvage value	1800
	Useful life	6
	Depreciation under straight line method = (12600-1800)/6	1800
	Depreciation percentage = Depreciation / Cost = 1800/12600	14.29%
	Depreciation % under double declining balance = 2* Straight line depreciation = 2*14.29%	28.57%
	Depreciation amount = 12600*28.57%	3600
	Entry:
	Particulars	Debit ($)	Credit ($)
	Depreciation expense	3600
	Accumulated depreciation - Machine C		3600
	To record depreciation for year 1