On January 2, year 1 Link Co. purchased a manufacturing machine for $864,000. The machine has an
Question:
On January 2, year 1 Link Co. purchased a manufacturing machine for $864,000. The machine has an eight year estimated life and a $144,000 estimated salvage value. Link expects to manufacture 1,800,000 units over the life of the machine.
During year 2, Link manufactured 300,000 units. During year 2, Link purchased an office building and the land on which it is located by paying $800,000 cash and assuming an existing mortgage of $200,000. The property is assessed at $960,000 for realty tax purposes, of which 60% is allocated to the building.
During year 2, Link leased construction equipment under a 7-year capital lease requiring annual year-end payments of $100,000. Link's incremental borrowing rate is 9%, while the lessor's implicit rate, which is not known to Link, is 8%. Present value factors for an ordinary annuity for seven periods are 5.21 at 8% and 5.03 at 9%. Fair value of the equipment is $515,000.
During year 2, Link paid $50,000 and gave a plot of undeveloped land with a carrying amount of $320,000 and a fair value of $450,000 to Club Co. in exchange for a plot of undeveloped land with a fair value of $500,000. The land was carried on Club's books at $350,000. This transaction has commercial substance.
1). For each depreciation method listed in the table below, calculate depreciation expense for year 2 (the second year of ownership) for the machine purchased on January 2, year 1.
- Method Amount
- Straight-line
- Double-declining-balance
- Sum-of-the-years'-digits
- Units of production
2). Calculate the amount to be recorded for each item in the table below and enter the value in the associated cell.
- Item Amount
- Building
- Leased equipment
- Land received from Club on Link's books
- Land received from Link on Club's books
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon