Question

Acme paid $120,000 for a machine with a $10,000 salvage value and an estimated life of 200,000 hours.

Acme reports on a calendar year basis and used the machine for 1800 hours during the first year it owned the asset. Which of the following statements accurately compare the first year depreciation expense if the asset had been purchased on January 1 of the current year versus a March 1 acquisition date. (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.)

A. Depreciation Expense if acquired January 1 is $1080 and if acquired March 1 is $900.

B. Depreciation Expense if acquired January 1 is $990 and if acquired March 1 is $743.

C. In both cases, the Depreciation Expense is $990.

D. Depreciation Expense if acquired January 1 is $990 and if acquired March 1 is $825.

Answer 1

Depreciation expense is based on the number of productive hours that a machine is used and in this case, remains the same regardless of whether the machine is purchased on January 1 or March 1, as long as it is used for 1800 hours in the first year. Therefore, the depreciation expense is $990 in both scenarios.

Step-by-step explanation:

The question relates to calculating depreciation expense using the straight-line method for a machine with a different acquisition date. The calculation is based on the number of hours the machine is used during the first year it is in service.

The cost of the machine is $120,000, with a salvage value of $10,000, and an estimated life of 200,000 hours. To find the depreciation per hour, subtract the salvage value from the cost and then divide by the machine's estimated useful life:

Depreciation per hour = (Cost - Salvage Value) / Estimated Life
Depreciation per hour = ($120,000 - $10,000) / 200,000 hours
Depreciation per hour = $110,000 / 200,000 hours
Depreciation per hour = $0.55

The first year depreciation expense if the asset had been purchased on January 1 for 1800 hours used:

January 1 Depreciation = 1800 hours * $0.55/hour
January 1 Depreciation = $990

If the machine is acquired on March 1, we typically assume two months less of depreciation for the first year. However, since the depreciation is based on the number of hours used rather than months, it would still be the same as long as the machine is used for 1800 hours in the first calendar year:

March 1 Depreciation = 1800 hours * $0.55/hour
March 1 Depreciation = $990

Therefore, the correct statement is: C. In both cases, the Depreciation Expense is $990.