Question

Company A purchased machinery with a list price of $96,000. They were given a 10% discount by the manufacturer. They paid $600 for shipping and sales tax of $4,500. Company A estimates that the machinery will have a useful life of 10 years and a residual value of $30,000. If Compnay A uses straight-line depreciation, annual depreciation will be

Answer 1

The annual depreciation will be $6,150

Step-by-step explanation:

First, let us calculate the total cost of purchasing the machinery as follows

list price = $96,000

percentage discount = 10% = 10/100 = 0.1

∴ Discount amount = 10% × 96,000 = 0.1 × 96,000 = $9,600

∴ New price after discount = 96,000 - 9,600 = $86,400

shipping cost = $600

sales tax = $4,500

Total cost of machinery = New price after discount + shipping cost + sales tax

= 86,400 + 600 + 4,500 = $91,500

useful life = 10 years

residual/salvage value = $30,000

Note that Straight-line depreciation allocates depreciation costs evenly over the useful life of the equipment, and the formula is shown below:

Straight-line depreciation = (cost of machinery - residual value) ÷ (useful life in years)

= (91,500 - 30,000) ÷ 10

= 61,500 ÷ 10 = $6,150