company bought a new machine for its warehouse on January 1 paid 10,000 $ in cash financed the rest of the purchase price via a 30,000 $ 5 year note incurred a separate 2000$ setup charge monthly depreciation is 500$ ( 6000$ annual) what is the book value of the new machine on December 31 ?
The correct answer and explanation is :
To determine the book value of the new machine on December 31, we need to calculate the total depreciation over the year and subtract it from the initial purchase price of the machine.
Steps:
- Initial Purchase Price of the Machine:
- The company paid \$10,000 in cash and financed the rest through a \$30,000 note.
- The total cost of the machine is the sum of these two amounts:
\$10,000 (cash payment) + \$30,000 (note) = \$40,000. - The setup charge of \$2,000 is a separate cost, and since it is directly related to getting the machine ready for use, it should be added to the initial cost.
\$40,000 + \$2,000 = \$42,000 is the total cost of the machine.
- Depreciation Calculation:
- The machine has a monthly depreciation of \$500.
- Over 12 months (one year), the total depreciation is:
\$500 × 12 months = \$6,000. - This depreciation is subtracted from the book value of the machine.
- Book Value on December 31:
- The book value is calculated by subtracting the total depreciation from the initial cost of the machine.
- \$42,000 (initial cost) – \$6,000 (depreciation) = \$36,000.
Thus, the book value of the machine on December 31 is \$36,000.
Explanation:
The machine’s book value is the amount the company paid for it, adjusted for depreciation. Depreciation is a method used to allocate the cost of the machine over its useful life. In this case, the machine’s depreciation is calculated at \$500 per month, which totals \$6,000 for the year. Depreciation reflects the wear and tear on the machine and reduces its book value over time.
Initially, the machine’s cost was \$42,000, but after one year of depreciation, the value on the company’s books drops to \$36,000. This figure reflects the machine’s value based on the cost to acquire it minus the depreciation that has occurred in the first year.