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Contemporary Mathematics for Busin...

8th Edition
Robert Brechner + 1 other
ISBN: 9781305585447

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BuyFindarrow_forward

Contemporary Mathematics for Busin...

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 $388,000.

Explanation

Given Information:

The cost of the new equipment is $388,000. The residual value of equipment is $48,000 and expected to last 20 years.

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:

Total amount of depreciation=Total costSalvage cost

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

Total amount of annual depreciation=Total depreciationestimated useful life

Calculation:

Consider the provided cost of new equipment is $388,000. The residual value of production facility is $48,000 which is expected to last 20 years

(b)

To determine

To calculate: The residual value of the hydraulic lift when the purchased cost is $11,640.

(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 $22,000.

(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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