A certain corn mill decided to sell its old engine which has been used for 5 years costing P7,200 new. The average operating cost per year thus far has been P4,200. The replacement costing P12,000 has an estimated life of 15 years, estimated annual operating cost 20% lower than that of the old engine. If interest is 5% and using straight-line depreciation, how much must the old engine be sold if its working life and its salvage value have been assumed as 15 years and P500, respectively? Actual total cost for the old engine considering depreciation, interest and operation is P347 less than that of the new. Salvage value of the replacement is P800.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A certain corn mill decided to sell its old engine which has been used for 5 years costing P7,200 new. The average operating cost per year thus far has been P4,200. The replacement costing P12,000 has an estimated life of 15 years, estimated annual operating cost 20% lower than that of the old engine. If interest is 5% and using straight-line
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