Question

Adams Inc. purchased a new punch press on January 1, 2017. The company paid $900,000 for the equipment, and also paid ABC Transport $37,000 to ship the press to its facility. Once the press arrived, Adams incurred expenditures of $15,000 for installation and $3,500 to test that the equipment was operating properly. The company also estimates that over the equipment's life it will require additional power, which will cause utility costs to increase $80,000. Adams expects that the press will be run a total of 30,000 hours over its 8-year useful life. The equipment has an estimated salvage value of $40,000. Reminder-show your work! What amount should the company capitalize for this equipment on January 1, 2017? 1. 2. If the company uses the straight line method to depreciate the press, complete the following chart for the first three years of usage of the equipment: Depreciation Expense Year Accumulated Depreciation 2017 2018 2019 3. What is the Net Book Value of the machine at the end of Year 3? 4. If the company had instead selected the Declining Balance method (an accelerated method of depreciating assets), the 2017 depreciation expense recorded would be expected to be The same as straight line b. Higher than straight line c. Lower than straight line d. Unable to determine without further information a. 5. If Adams instead uses the Activity Method to record depreciation, what would be recorded as depreciation expense for 2017 if the press was run for 3,950 hours? MacBook Air

Answer 1

Answer 1
Price of equipment		$          900,000
Transport cost		$             37,000
Installation costs		$             15,000
Testing costs		$               3,500
Amount capitalize to equipment on January 1, 2017		$          955,500
Answer 2
Amount capitalize to equipment on January 1, 2017		$          955,500
Less: residual value		$             40,000
Depreciable cost		$          915,500
Divided by: useful life in years		8
Depreciation expense per year		$    114,437.50
Accumulated depreciation at the end of 2016		$                 0.00
Add: Depreciation expense for 2017		$    114,437.50
Accumulated depreciation at the end of 2017		$    114,437.50
Add: Depreciation expense for 2018		$    114,437.50
Accumulated depreciation at the end of 2018		$    228,875.00
Add: Depreciation expense for 2019		$    114,437.50
Accumulated depreciation at the end of 2019		$    343,312.50
Year	Depreciation expense	Accumulated depreciation
2017	$ 114,437.50	$    114,437.50
2018	$ 114,437.50	$    228,875.00
2019	$ 114,437.50	$    343,312.50
Answer 3
Amount capitalize to equipment on January 1, 2017		$    955,500.00
Less: Accumulated depreciation at the end of 2019		$    343,312.50
Net book value of machine at the end of the third year		$    612,187.50
Answer 4
Accelerated depreciation method is depreciation method that distribute the higher depreciation during the initially periods.
Depreciation rate as per straight line method (1/8)		12.50%
Depreciation rate as per double decline balance method (2*12.5%)		25.00%
Depreciation expense for 2017 under straight line method		$    114,437.50
Depreciation expense for 2017 under double decline balance method (955500*25%)		$    238,875.00
Correct option is B	Higher than straight line
Answer 5
Amount capitalize to equipment on January 1, 2017		$          955,500
Less: residual value		$             40,000
Depreciable cost		$          915,500
Divided by: useful life in hours		30,000
Depreciation rate per hour		$   30.5166667
Multiply: Actual hours used in 2017		3,950
Depreciation expense when 3950 hours		$    120,540.83