Composite depreciation versus individual-item depreciation. Cord Manufacturing acquired three used machine tools for a total price of $68,000. Costs to transport the machine tools from the seller to Cord's factory were $4,000. Cord renovated, installed, and put the machine tools to use in manufacturing the firm's products. The costs of renovation and installation were as follows;

The machine tools have the following estimated remaining lives: tool A, six years;
tool B, eight years; tool C, four years.

a. Assume that Cord capitalizes each machine tool in a separate asset account and uses the remaining life of each machine tool as the basis for allocating the joint costs of acquisition. Compute the depreciable cost of each of the three machine tools.

b. Present journal entries to record depreciation charges for years 1, 5, and 8, given the assumption in part

a. Use the straight-line method.

c. Assume that Cord treats the three machine tools as one composite asset in the accounts.
If management decides to depreciate the entire cost of the composite asset on a straight-line basis over eight years, what is the depreciation charge for each year?

d. Which treatment, a or

c, should management of Cord Manufacturing probably prefer for tax purposes and why?

Transcribed Image Text:

Renovation Costs Installation Costs Machine Tool A $1,100 400 Machine Tool B $1,800 600 Machine Tool C $1,700 300