Question

In: Accounting

On January 1, 2010, the Felix Company purchased a machine to use in the manufacture of...

On January 1, 2010, the Felix Company purchased a machine to use in the manufacture of its product. The invoice cost of the machine was $260,000. At the time of acquisition, the machine had an original estimated useful life of 10 years and an estimated salvage value of $20,000. Annual depreciation was recorded at $24,000 per year. The machine was depreciated using the straight-line method. On August 1, 2015, Felix exchanged the old machine for a newer model. The new machine had a fair market value of $200,000. The estimated fair value of the old machine was $150,000. Felix also paid $50,000 as part of the exchange transaction. The old machine was depreciated on Felix’s books up through December 31, 2014.

  1. Bring Felix’s depreciation on this machine up to date through the date of the exchange.

Solutions

Expert Solution

Given Information

Cost of Machinery = $ 260000

Estimated Life = 10 Yrs

Estimated salvage Value = $ 20000

Depreciation on straight line method

Annual Depreciation provided = $ 24000

Calculation of Depreciation Upto Dec 31, 2014

No of years from 1st Jan 2010 to 31st Dec 2014 = 4 yrs

Depreciation for 4 yrs = 24000 * 5 = $ 96000

Value of Machinery as on 31st Dec 2014 = $ 260000 - $ 120000

= $ 140000

Depreciation for 7 months in the year 2015 (i.e Upto the date of exchange ) = (24000/12)*7

= 14000

Book Value of Machinery on 1st August 2015 = (140000- 14000) = $ 126000

Depreciation Schedule upto 1st Aug 2015

Year   Openning Balance Depreciation Provided   Closing Balance
2010       2,60,000           24,000     2,36,000
2011       2,36,000           24,000     2,12,000
2012       2,12,000           24,000     1,88,000
2013       1,88,000           24,000     1,64,000
2014       1,64,000           24,000     1,40,000
31-07-2015       1,40,000           14,000     1,26,000
     
  

Total Accumulated Depreciation = $ 134000

Estimated Fair Value on 1st Aug 2015 = $150000

Fair Market Value of New machinery =$ 200000

Accounting Entry for exchange of asset transaction

1st Aug 2015 Accumulated Depreciation A/c Dr. $ 134000

New Machinery A/c Dr. $ 200000

To old Machinery A/c $ 260000

To Gain A/c $ 24000

To Cash A/c $50000

( To remove all accounts relate to old machinery and cash, Set up the new machinery value at its fair value

and recording the gain in exchange)

ekkarill92 answered 1 year ago
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