Question

CH. 6

#1: Lone Star Sales & Service acquired a new machine that cost $84,000 in early 2016. The machine is expected to have a five-year useful life and is estimated to have a salvage value of $14,000 at the end of its life. (Round your final answers to the nearest dollar.)

(a.) Using the straight-line depreciation method, calculate the depreciation expense to be recognized in the second year of the machine's life and calculate the accumulated depreciation after the third year of the machine's life.

(b.) Using the double-declining-balance depreciation method, calculate the depreciation expense for the third year of the machine's life and the net book value of the machine at this point in time.

#2: Lessee, Inc., acquired the use of a machine by agreeing to pay the manufacturer of the machine $20,000 per year for 5 years. At the time the lease was signed, the interest rate for a 5-year loan was 8%.

Required:

(a.) Use the appropriate factor to calculate the amount that Lessee, Inc. could have paid at the beginning of the lease to buy the machine outright.
(b.) What causes the difference between the amount you calculated in part (a.) and the total of $100,000 ($20,000 per year for 5 years) that Lessee, Inc. will pay under the terms of the lease?
(c.) What is the appropriate amount of cost to be reported in Lessee, Inc's balance sheet (at the time the lease was signed) with respect to this asset?

Answer 1

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