P10-3A On January 1, 2006, Solomon Company purchased the following two machines for use in its production process.
Machine A: The cash price of this machine was $38,500. Related expenditures included:
sales tax $2,200, shipping costs $175, insurance during shipping $75, installation
and testing costs $50, and $90 of oil and lubricants to be used with the
machinery during its first year of operation. Solomon estimates that the useful
life of the machine is 4 years with a $5,000 salvage value remaining at the
end of that time.
Machine B: The recorded cost of this machine was $100,000. Solomon estimates that the
useful life of the machine is 4 years with a $8,000 salvage value remaining at
the end of that time.
Instructions
(a) Prepare the following for Machine A.
(1) The journal entry to record its purchase on January 1, 2006.
(2) The journal entry to record annual depreciation at December 31, 2006, assuming the
straight-line method of depreciation is used.
(b) Calculate the amount of depreciation expense that Solomon should record for machine B
each year of its useful life under the following assumption.
(1) Solomon uses the straight-line method of depreciation.
(2) Solomon uses the declining-balance method.The rate used is twice the straight-line rate.
(3) Solomon uses the units-of-activity method and estimates the useful life of the machine
is 25,000 units. Actual usage is as follows: 2006, 6,500 units; 2007, 7,500 units; 2008, 6,000
units; 2009, 5,000 units.
(c) Which method used to calculate depreciation on machine B reports the lowest amount of
depreciation expense in year 1 (2006)? The lowest amount in year 4 (2009)? The lowest
total amount over the 4-year period?
