On January 3, Pedroia Corporation Purchased A New Machine
1 On January 3 Pedroia Corporation Purchased A New Machine From Abc
On January 3, Pedroia Corporation purchased a new machine from ABC Harvestor for $75,000. In addition, the cost to ship the machine to the Pedroia plant was $500; Pedroia Corp. insured the machine while it was in transit at a cost of $600; Pedroia Corporation paid $2,500 to repair the machine for damage caused by vandalism while in storage before installation; ABC Harvestor sent two of its men to Pedroia Corp. to help with the installation of the machine and charged Pedroia Corp. $3,200. Pedroia Corp. paid $1,500 for initial training of employees to be able run the machine. Pedroia Corp. paid $500 to repair the machine after it was in operation. It is estimated that the machine will have a useful life of 5 years and a salvage value of $2,500.
Assignment Tasks:
- Calculate the amount to be debited to the plant asset account.
- Determine the depreciation expense for the first three years using the double-declining balance method.
Paper For Above instruction
The acquisition of a new machine by Pedroia Corporation involves multiple costs that should be capitalized to the plant asset account, followed by an appropriate depreciation calculation over its useful life. This process ensures that the company's financial records accurately reflect the value and expense recognition associated with the asset, adhering to generally accepted accounting principles (GAAP).
Cost Capitalization of the Machine
The initial cost of the machine, purchase price, and costs directly attributable to bringing the asset to the location and condition necessary for its intended use are capitalized. The purchase price is $75,000. Transportation costs to deliver the machine to the plant, totaling $500, are included in the capitalized cost because they represent necessary costs of getting the asset ready for use. Insurance during transit, costing $600, is also capitalized as part of the asset because it is a prerequisite to the asset reaching the operational condition for use (Arnold & Doupnik, 2020).
Repairs caused by vandalism prior to installation, costing $2,500, are necessary to restore the machine to operational condition and are capitalized as part of the asset's cost (Kieso, Weygandt, & Warfield, 2019). The charge for installation assistance from ABC's personnel, amounting to $3,200, directly facilitates bringing the asset into working condition and is capitalized.
Training costs, amounting to $1,500, are typically considered operational expenses and expensed in the period incurred unless they extend or improve the asset's functionality. Given the context, this cost is more appropriately expensed since it relates to employee training rather than preparing the asset for use.
Certain post-installation repair costs, such as the $500 to repair the machine after operation, are operational expenses and are not capitalized. They are recognized as expenses in the period incurred.
In summary, the capitalized cost includes:
- Purchase price: $75,000
- Transportation cost: $500
- Insurance during transit: $600
- Vandalism repairs: $2,500
- Installation assistance: $3,200
Total capitalized cost equals $82,000 ($75,000 + $500 + $600 + $2,500 + $3,200).
Depreciation Calculation: Double-Declining Balance Method
The machine's estimated useful life is five years, with a salvage value of $2,500. Using the double-declining balance (DDB) method accelerates depreciation early in the asset's life by applying twice the straight-line rate to the declining book value annually (Moss, 2018).
The straight-line depreciation rate is 1/5 = 20%. Doubling this rate yields 40%. However, under DDB, depreciation for each year is calculated as 40% of the book value at the beginning of the year, with the depreciation expense limited so that the book value does not fall below the salvage value.
Calculations over the first three years are as follows:
Year 1:
- Beginning book value: $82,000
- Depreciation expense: 40% of $82,000 = $32,800
- Ending book value: $82,000 - $32,800 = $49,200
Year 2:
- Beginning book value: $49,200
- Depreciation expense: 40% of $49,200 = $19,680
- Ending book value: $49,200 - $19,680 = $29,520
Year 3:
- Beginning book value: $29,520
- Depreciation expense: 40% of $29,520 = $11,808
- Ending book value: $29,520 - $11,808 = $17,712
In subsequent years, depreciation calculations continue similarly, but the book value cannot depreciate below the salvage value of $2,500. Therefore, in Year 4 and Year 5, depreciation will be adjusted to ensure the book value does not fall below this threshold.
Conclusion
In conclusion, Pedroia Corporation should capitalize total costs of $82,000 as the asset's cost basis. Using the double-declining balance method, depreciation expenses for the first three years are $32,800, $19,680, and $11,808, respectively. This method provides higher depreciation charges in the initial years, aligning with the typical pattern of asset usage and obsolescence.
References
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- Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (16th ed.). Wiley.
- Moss, R. (2018). Depreciation methods and their impact on financial statements. Accounting Today.
- Scale, P. (2021). Asset capitalization and depreciation. Journal of Accounting Perspectives, 35(2), 45-59.
- Wild, J. J., Subramanyam, K. R., & Halsey, R. (2020). Financial statement analysis (12th ed.). Pearson.
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- FASB. (2022). Accounting standards codification – Property, plant, and equipment. Financial Accounting Standards Board.
- Investopedia. (2023). Double-declining balance depreciation method. https://www.investopedia.com