Question

Machinery was purchased for $340,000 on January 1, 2017. Freight charges amounted to $14,000 and

there was a cost of $40,000 for building a foundation and installing the machinery. It is estimated that the

machinery will have a $60,000 salvage value at the end of its 5-year useful life. What is the amount of

accumulated depreciation at December 31, 2018, if the straight-line method of depreciation is used?

a.$133,600.

b.$66,800.

c.$57,200.

d.$114,400.

Answer 1

Correct answer is A, $133,600

Step-by-step explanation:

First, let’s compute the capitalizable amount of an asset on January 1, 2017.

Cost of machinery $340,000 plus the freight charges of $14,000 and the installation cost of $40,000 equals $394,000. Capitalizable cost includes all expenses incurred in bringing the asset in to its usable stage.

Second, let’s compute the depreciation expense using straight line method in December 31, 2017.

(Cost of asset - salvage value) / life of an asset

($394,000 - $60,000) / 5 years = $66,800

Finally, we can now compute the accumulated depreciation as of December 31, 2018 by multiplying annual depreciation computed previously (January 1, 2017 to December 31, 2017) by 2.

So, $66,800 x 2 years (2017 & 2018) = $133,600