Question

5. A company has gross fixed assets of $15 million on Jan.1 with accumulated depreciation of $3.8 million and continuing annual depreciation expense of $300,000. On Jan.1, the firm buys a new machine costing $600,000. The new machine will be depreciated straight line over an 8 year life with no salvage value. Calculate the net fixed assets at the end of the year.

Answer 1

Net fixed assets = Gross fixed assets - Accumulated depreciation

First we will calculate the annual depreciation expense on new machine as per below:

Under the straight line method, depreciation is calculated by the following formula:

Depreciation = Cost - Salvage value / Useful life

Cost = $600000, Salvage value = $0, useful life = 8

Depreciation = ($600000 - $0) / 8 = $75000

Under straight line method, depreciation remains the same for every year. So annual depreciation for next 8 years on this machine will be $75000.

Now, we have,

Gross fixed assets at the end of year = Gross fixed assets at the beginning + Machine purchased

Gross fixed assets at the end of year = $15m + $600000 = $15600000

Accumulated depreciation at the end of year = Beginning accumulated depreciation + Annual depreciation expense

Accumulated depreciation at the end of year = $3800000 + ($300000 + $75000) = $4175000

Net fixed assets at the end of year = Gross fixed assets - Accumulated depreciation

Net fixed assets at the end of year = $15600000 - $4175000 = $11425000