Question

Natural Company purchased a new machine for production on January 1, 2014. The company intends to depreciate it over 5 years using double-declining balance method. The salvage value is $6,000. Purchase price $60,000 Sales tax $5,175 Insurance during shippiing $2,600 Installation and testing $2,225 Extended service warranty $1,200 a) Calculate the cost of the new machine.

b)	Prepare the journal entry to record the machine purchase.
c)	Prepare the depreciation schedule for the five year period.

Answer 1

a) Cost of new machine  

Purchase price - 60000

add: Sales tax - 5175

add: Insurance - 2600

add: Installation expense - 2225

Total cost of the machine = 70,000

b) Machinery a/c Dr 70000

To cash/ bank/creditor 70000

c) calculation of depreciation for 5 years   

Cost of the asset - 70000

Salvage value - 6000

The useful life of the asset - 5 years

depreciation rate - 1/useful life *100 = 1/5*100 = 20%

Double declining balance formula = 2* cost of the asset * depreciation rate

Here , it will be 2*20% =40%

Year 1 Depreciation = $ 70000*40% = $ 28000

Year 2 Depreciation = $ 42000 *40% = $16800

Year 3 Depreciation = $25200* 40% = $10080   

Year 4 Depreciation= $ 15120* 40% = $6048   

Year 5 Depreciation = $ 9072*40% = $3628.8

d) Entry for depreciation for the year 2018

Depreciation a/c Dr $64,556.8

To Accumulated depreciation $64,556.8

(sum total of depreciation amount is tranfered to accumulated depreciation a/c)