In: Accounting
QUESTION 22
Link completed the following transactions:
On January 2, year 1 Link Co. purchased a manufacturing machine for
$864,000. The machine has an eight year estimated life and a
$144,000 estimated salvage value. Link expects to manufacture
1,800,000 units over the life of the machine. During year 2, Link
manufactured 300,000 units.
During year 2, Link purchased an office building and the land on
which it is located by paying $800,000 cash and assuming an
existing mortgage of $200,000. The property is assessed at $960,000
for realty tax purposes, of which 60% is allocated to the
building.
During year 2, Link leased construction equipment under a 7-year
capital lease requiring annual year-end payments of $100,000.
Link's incremental borrowing rate is 9%, while the lessor's
implicit rate, which is not known to Link, is 8%. Present value
factors for an ordinary annuity for seven periods are 5.21 at 8%
and 5.03 at 9%. Fair value of the equipment is $515,000.
During year 2, Link paid $50,000 and gave a plot of undeveloped
land with a carrying amount of $320,000 and a fair value of
$450,000 to Club Co. in exchange for a plot of undeveloped land
with a fair value of $500,000. The land was carried on Club's books
at $350,000. This transaction has commercial substance.
For each depreciation method listed in the table below, calculate
depreciation expense for year 2 (the second year of ownership) for
the machine purchased on January 2, year 1. Click in the associated
cell and enter the appropriate value. Round all amounts to the
nearest whole number.
Method | Amount |
Straight-line | |
Double-declining-balance | |
Sum-of-the-years'-digits | |
Units of production |
Calculate the amount to be recorded for each item in the table
below and enter the value in the associated cell. Round all numbers
to the nearest whole number.
Item | Amount |
Building | |
Leased equipment | |
Land received from Club on Link's books | |
Land received from Link on Club's books |
Solution:
Working Notes:
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