Question

A company purchased and installed machinery on January 1 at a total cost of $93,000. Straight-line depreciation was calculated based on the assumption of a five-year life and no salvage value. The machinery was disposed of on July 1 of year four. The company uses the calendar year.

A) The machinery cost is fully depreciated.
B) The disposal has no impact on depreciation.
C) Depreciation is calculated based on the disposal date.
D) Salvage value affects depreciation calculations.

Answer 1

The machinery is not fully depreciated by the time of disposal on July 1 of year four. Depreciation is calculated based on the disposal date, resulting in a half-year depreciation for the fourth year since the machinery was installed on January 1 with no salvage value. C. is the correct option.

Step-by-step explanation:

The disposal of the machinery has an impact on the depreciation calculation. Since the machinery was disposed of on July 1 of year four, only a half-year of depreciation will be calculated for the fourth year.

To determine the annual depreciation expense, we would divide the total cost of the machinery, $93,000, by the estimated useful life of 5 years, which yields an annual depreciation expense of $18,600. By the beginning of year four, three full years of depreciation have been taken ($18,600 * 3 = $55,800).

For the fourth year, we calculate a half-year of depreciation, which is $9,300 ($18,600 / 2). Therefore, the depreciation up to the disposal date would be $55,800 (years 1-3) + $9,300 (half of year 4), totaling $65,100. This means that the machinery is not fully depreciated by the disposal date, and the correct option is C) Depreciation is calculated based on the disposal date. Salvage value does not affect the calculations in this scenario as it was assumed to be zero.