Chapter 17.I, Problem 33RE

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8th Edition

Robert Brechner + 1 other

ISBN: 9781305585447

Textbook Problem

BUSINESS DECISION: REPLACING AN ASSET

Supreme Auto Service opened a new service center three decades ago. At the time the center was preparing to open, new equipment was purchased totaling $388,000. Residual value of the equipment was estimated to be $48,000 after 20 years. The company accountant has been using straight-line depreciation on the equipment.

a. How much was the annual depreciation for the original equipment?

b. If the hydraulic lift had originally cost $11,640. what would its residual value be after 20 years?

c. After six years of operation, the original hydraulic lift was replaced with a new model that cost $22,000. Book value was allowed for the old machine as a trade-in. What was the old hydraulic lift’s book value when the replacement machine was bought?

d. What was the book value of the equipment inventory at the six-year point, substituting the new hydraulic lift for the original after the new lift had joined the inventory?

**(a)**

To determine

**To calculate:** The annual depreciation of the equipment of Supreme Auto Service when the new equipment purchased cost is

Explanation

**Given Information:**

The cost of the new equipment is

**Formula used:**

The steps to calculate annual depreciation by straight line method are as follows:

Step 1: Calculate the total cost.

Step 2: Calculate the total amount of depreciation by subtracting salvage value from the total cost as:

Step 3: Calculate the annual depreciation by dividing estimated useful life from the total amount of depreciation as:

**Calculation:**

Consider the provided cost of new equipment is

**(b)**

To determine

**To calculate:** The residual value of the hydraulic lift when the purchased cost is

**(c)**

To determine

**To calculate:** The book value of old hydraulic lift of Supreme Auto Service when the cost of new model of hydraulic lift is

**(d)**

To determine

**To calculate:** The book value of equipment of Supreme Auto Service at six-year point when the new hydraulic lift is substituted in place of old hydraulic lift.

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