Computing The Acquisition Cost And Recording Deprec

P8 3p8 3 Computing The Acquisition Cost And Recording Depreciation Und

The assignment involves calculating the acquisition cost of three different used fitness machines purchased by Plummer’s Sports Center and then recording their depreciation expenses for the first year using three different depreciation methods: straight-line, units-of-production, and double-declining balance. The goal is to apply each method accurately based on the provided data, calculate the depreciation expense for each machine, and prepare the appropriate journal entry for depreciation at the end of the first year.

Specifically, the task involves:

• Calculating the total acquisition cost for each machine, considering the purchase price, installation costs, and renovation expenses prior to use.
• Using three different depreciation methods for each machine, considering their estimated useful lives and residual values.
• Computing the depreciation expense based on operating hours or timeframe, depending on the method.
• Preparing a journal entry to record the depreciation expense at the end of Year 1.

Paper For Above instruction

The process of accurately determining the acquisition cost and recording depreciation is vital for ensuring that a company's financial statements reflect a true and fair view of its assets' value over time. In the context of Plummer’s Sports Center, the purchase of used fitness machines presents particular challenges and considerations, especially given that each machine has different characteristics and expected useful lives. The adherence to accounting standards, such as GAAP, guides the appropriate measurement and depreciation recording methodologies.

The initial step involves calculating the acquisition cost of each machine. According to accounting principles, the acquisition cost includes the purchase price and all costs necessary to prepare the asset for its intended use. For Machine A, B, and C, the purchase prices are $11,000, $30,000, and $8,000 respectively. Adding installation and renovation costs, which are necessary to make the assets operational, results in the total initial cost for each asset. Although the provided data for renovation costs seem incomplete, the typical calculation would aggregate purchase price, installation, and renovation costs to derive the total cost.

Once the acquisition costs are established, depreciation needs to be recorded systematically to allocate the asset’s cost over its useful life. The selection of depreciation methods depends on the asset's usage patterns and the accuracy needed in financial reporting.

The first method, the straight-line depreciation, spreads the asset’s cost evenly over its useful life. For Machine A with a 5-year life and a residual value of $1,000, annual depreciation equals (Cost - Residual value) / Useful life. The depreciation expense would thus be calculated as (Total cost - $1,000) / 5.

The second method, units-of-production, bases depreciation on usage, calculated per hour of operation. For Machine B, which has an estimated total life of 60,000 operating hours and a residual value of $2,000, depreciation per hour is (Cost - Residual value) / Total estimated hours. Operating 4,800 hours in Year 1, the depreciation expense equals per-hour depreciation multiplied by those hours.

The third method, double-declining balance, accelerates depreciation, giving a higher expense early on. It reduces the book value at twice the straight-line rate each year, applying the rate to the book value at the start of the period, before subtracting accumulated depreciation.

Applying each method involves precise calculations. For example:

• Machine A (straight-line): Depreciation = (Cost - Residual Value) / Useful Life
• Machine B (units-of-production): Depreciation = (Cost - Residual Value) / Total Hours x Hours Operated
• Machine C (double-declining balance): Depreciation = 2 / Useful Life x Beginning Book Value

Following calculations, the journal entry to record depreciation expense at the end of Year 1 would debit Depreciation Expense and credit the respective accumulated depreciation accounts for each machine.

In conclusion, proper calculation and recording of depreciation not only comply with accounting standards but also aid management in making informed decisions regarding asset maintenance, replacement, and financial planning. Accurate asset valuation impacts balance sheets, income statements, and financial ratios, emphasizing the importance of meticulous computation and documentation.

References

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