Martinez Corporation uses special strapping equipment in its packaging business. The equipment was purchased in January 2019 for $9.00 million and had an estimated useful life of 8 years with no residual value. In early April 2020, a part costing $790,000 and designed to increase the machinery’s efficiency was added. The machine’s estimated useful life did not change with this addition. By December 31, 2020, new technology had been introduced that would speed up the obsolescence of Martinez’s equipment. Martinez’s controller estimates that expected undiscounted future net cash flows on the equipment would be $5.67 million, and that expected discounted future net cash flows on the equipment would be $5.22 million. Fair value of the equipment at December 31, 2020, was estimated to be $5.04 million. Martinez intends to continue using the equipment, but estimates that its remaining useful life is now four years. Martinez uses straight-line depreciation. Assume that Martinez is a private company that follows ASPE.
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.
Martinez Corporation uses special strapping equipment in its packaging business. The equipment was purchased in January 2019 for $9.00 million and had an estimated useful life of 8 years with no residual value. In early April 2020, a part costing $790,000 and designed to increase the machinery’s efficiency was added. The machine’s estimated useful life did not change with this addition. By December 31, 2020, new technology had been introduced that would speed up the obsolescence of Martinez’s equipment. Martinez’s controller estimates that expected undiscounted future net cash flows on the equipment would be $5.67 million, and that expected discounted future net cash flows on the equipment would be $5.22 million. Fair value of the equipment at December 31, 2020, was estimated to be $5.04 million. Martinez intends to continue using the equipment, but estimates that its remaining useful life is now four years. Martinez uses straight-line
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