Question

At the beginning of the year, Seraglio Companies bought machinery, shelving, and a forklift. The machinery initially cost $29,600 but had to be overhauled (at a cost of $2,000) before it could be installed (at a cost of $1,000) and finally put into use. The machinery’s total life was estimated as 40,000 hours, with an estimated residual value of $1,000. The machinery was actually used 5,000 hours in year 1 and 7,000 hours in year 2. Repair costs were $450 in each year. The shelving cost $9,800 and was expected to last 5 years, with a residual value of $700. The forklift cost $15,300 and was expected to last six years, with a residual value of $2,200. Compute the amount to be capitalized for the machinery.

Answer 1

To compute the amount to be capitalized for the machinery, you need to consider the initial cost, overhaul cost, installation cost, and usage of the machinery. The amount to be capitalized for the machinery is $24,720.

Step-by-step explanation:

To compute the amount to be capitalized for the machinery, we need to consider the initial cost, overhaul cost, installation cost, and usage of the machinery. The initial cost of the machinery is $29,600. The overhaul cost is $2,000, and the installation cost is $1,000. The machinery was used for 5,000 hours in year 1 and 7,000 hours in year 2.

First, we need to calculate the accumulated depreciation. Depreciation per hour is calculated by dividing the initial cost minus the estimated residual value by the estimated total hours of use: ($29,600 - $1,000) / 40,000 = $0.74 per hour. The accumulated depreciation for year 1 is $0.74 x 5,000 = $3,700. The accumulated depreciation for year 2 is $0.74 x 7,000 = $5,180.

The amount to be capitalized for the machinery is calculated by subtracting the accumulated depreciation from the initial cost and adding the overhaul and installation costs: $29,600 - $3,700 - $5,180 + $2,000 + $1,000 = $24,720.