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At the beginning of the year, Oak mountain Company bought three used machines from Canadian Manufacturing, Inc.

Question:

At the beginning of the year, Oak mountain Company bought three used machines from Canadian Manufacturing, Inc. The machines immediately were overhauled, installed, and started operating. Because the machines were different from each other, each was recorded separately in the accounts. 

Machine A Machine B Machine C Amount paid for asset $19,600 $10,100 $9,800 Installation costs 300 500 200 Renovation costs prior to use 100 300 600 Repairs after production began 220 900 480

By the end of the first year, each machine had been operating 4,000 hours.


Required: 

1. Compute the cost of each machine. Explain the rationale for capitalizing or expensing the various costs. 

2. Give the journal entry to record depreciation expense at the end of year 1, assuming the following 

Transcribed Image Text:

Amount paid for asset Installation costs Renovation costs prior to use Repairs after production began Machine A $19,600 300 1.00 220 Machine B $10,100 500 300 900 Machine C $9,800 200 600 480

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1 Cost of each machine Machine A B C Total Purchase price 19600 10100 9800 39500 Installation costs ...View the full answer


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Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.

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