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Ch 9 Practice

# Ch 9 Practice - 1 Barker Company purchased factory...

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1 . Barker Company purchased factory equipment with an invoice price of \$60,000. Other costs incurred were freight costs, \$1,300; installation wiring and foundation, \$2,200; material and labor costs in testing equipment, \$700; oil lubricants and supplies to be used with equipment, \$500; fire insurance policy covering equipment, \$1,500. The equipment is estimated to have a \$5,000 salvage value at the end of its 10-year useful service life. Instructions (a) Compute the acquisition cost of the equipment. Clearly identify each element of cost. (b) If the straight-line method of depreciation was used, the annual rate applied to the depreciable cost would be __________. Solution 1 (a) Invoice cost \$60,000 Freight costs 1,300 Installation wiring and foundation 2,200 Material and labor costs in testing 700 Acquisition cost \$64,200 (b) If the straight-line method of depreciation was used, the annual rate applied to the depreciable cost would be 10% (100% ÷ 10 years), making the annual depreciation \$5920 (64200-5000=59200/10) 2. Equipment was acquired on January 1, 2003, at a cost of \$60,000. The equipment was originally estimated to have a salvage value of \$5,000 and an estimated life of 10 years.

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Depreciation has been recorded through December 31, 2006, using the straight-line method. On January 1, 2007, the estimated salvage value was revised to \$6,000 and the useful life was revised to a total of 8 years. Instructions Determine the Depreciation Expense for 2007. Solution 2 (5 min.) Calculate the Book Value at the time of the revision: \$60,000 – \$5,000 ———————— = \$5,500 annual depreciation expense 10 years 4 years have been depreciated: \$5,500 × 4 = \$22,000 Book Value at the time of the revision: \$60,000 – \$22,000 = \$38,000 Calculate the revised annual depreciation: \$38,000 – \$6,000 ———————— = \$8,000 revised annual depreciation 4 years remaining The Depreciation Expense for 2007 is \$8,000.
3. The Danson Company purchased a machine on January 1, 2007. In addition to the purchase price paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b) transportation and insurance costs while the machinery was in transit from the seller, (c) personnel training costs for initial operation of the machinery, (d) installation costs necessary to secure the machinery to the building flooring, (e) major overhaul to extend the life of the machinery, (f) lubrication of the machinery gearing before the machinery was placed into service, (g) lubrication of the machinery gearing after the machinery was placed into service, and (h) annual city operating license. Instructions Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces provided: C = Capital, R = Revenue.

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Ch 9 Practice - 1 Barker Company purchased factory...

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