Question
Sierra Nevada Water Corporation paid $270,000 to purchase equipment for use in its manufacturing operations. In addition, Sierra Nevada Water Corporation incurred the following expenditures
Sierra Nevada Water Corporation paid $270,000 to purchase equipment for use in its manufacturing operations. In addition, Sierra Nevada Water Corporation incurred the following expenditures relating to the equipment:
$1,500 freight to have the equipment shipped to its manufacturing facility
$750 insurance while the equipment was in transit
$3,200 for special steel and concrete reinforcements used to house the equipment in the factory
$1,200 for a one-year insurance policy on the equipment after it has been installed
$300 to test the equipment before it is placed in service
$400 for maintenance costs during the first year of service
Required:
Calculate the cost of the equipment that would be capitalize on the balance sheet.
Small Valley Ltd. purchased machinery on January 2, 2015, at a total cost of $85,000. The machinery's estimated useful life is 8 years or 60,000 hours, and its residual value is $5,000. The tax rate for CCA is 30%. During 2015 and 2016, the machinery was used 7,000 and 7,500 hours, respectively.
Required:
- Compute depreciation under straight-line, units-of-production, and declining-balance methods for 2015 and 2016.
- If managements objective in 2015 is to maximize income which method would you prefer? If it was income smoothing which method would you prefer?
- It was decided in 2015 that Small Valley would use the straight-line method of depreciation. In December 30, 2016 Small Valley sold the equipment for $55,000 cash. Prepare ALL journal entries relating to the equipment and disposal in 2016.
- It was decided in 2015 that Small Valley would use the deminishing balance method of depreciation. In December 30, 2016 Small Valley sold the equipment for $55,000 cash. Prepare ALL journal entries relating to the equipment and disposal in 2016.
- Looking at your answers in part c) and d) explain why there was a difference in the gain or loss recorded from the sale of the equipment.
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