Question

On September 1, 2011, a company purchased a weaving machine for $239,800. The machine has an estimated useful life of 8 years and an estimated residual value of $17,800. Additionally, it is estimated that the machine would produce 740,000 bolts of woven fabric over its useful life. The company ended up selling the machine in 2018 after 1 month of use. The following budgeted and actual activity levels were provided to support your work: Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 total Budgeted Bolts Budgeted cumulative 20,000 20,000 100,000 120,000 100,000 220,000 100,000 320,000 100,000 420,000 85,000 505,000 85,000 590,000 85,000 675,000 65,000 740,000 740,000 Actual Bolts actual cumulative 35,000 35,000 115,000 150,000 116,000 266,000 119,000 385,000 120,000 505,000 117,000 622,000 112,000 734,000 9,000 743,000 n.a. 743,000

Answer 1

i. TRUE

If the selling price is more than the carrying value, 17800, the company will record a gain .

ii. Depreciation under straight-line method will be

(Cost-Residual Value)/No.of yrs. Of useful life

ie.(239800-17800)/8=

27750

Under units-of -production

Depreciable value = 239800-17800=

222000

Depreciation every year= Depreciable Value/Budgeted units* Actual units for the yr.

Hence , the following depn. Table,

Year	Depn.under u-o-p		Book Value
			239800
2011	222000/740000*35000=	10500	229300
2012	222000/740000*115000=	34500	194800
2013	222000/740000*116000=	34800	160000
2014	222000/740000*119000=	35700	124300
2015	222000/740000*120000=	36000	88300
2016	222000/740000*117000=	35100	53200
2017	222000/740000*112000=	33600	19600
2018		1800	17800
			(Salvage)

From the above, it is clear that depn. Amt. every year is different under both the methods.

so, ii. Is not TRUE

iii. Depn. Under St.line method is $ 27750 in 2011

& depn. Under U-O-P method is $ 10500 in 2011

so, the company will report more net income in 2011 under U-o-P method than under St. line method

So, iii. Is TRUE

iv.FALSE--Under US GAAP, the company should apply the budgeted activity rate to the actual units of production ,in respective years.

From the above,

i& iii are TRUE

so, we can select choices

A & C