On January 1, 2008, Arlo Company purchased the following two machines for use in its production process:
Machine A: The cash price of this machine was $55,000. Related expenditures included: sales tax $2,750, shipping costs $100, insurance during shipping $75, installation and testing costs $75, and $90 of oil and lubricants to be used with the machinery during its first year of operation. Arlo estimates that the useful life of the machine is 4 years with a $5,000 salvage value remaining at the end of that time period.
Machine B: The recorded cost of this machine was $100,000. Arlo estimates that the useful life of the machine is 4 years with a $10,000 salvage value remaining at the end of that time period.
(a) Prepare the following for Machine A.
(1) The journal entry to record its purchase on January 1, 2008. (2) The journal entry to record annual depreciation at December 31, 2008, assuming the straight-line method of depreciation is used.
(b) Calculate the amount of depreciation expense that Arlo should record for machine B each year of its useful life under the following assumption. (1) Arlo uses the straight-line method of depreciation.
(2) Arlo uses the declining-balance method.The rate used is twice the straight-line rate. (3) Arlo uses the units-of-activity method and estimates the useful life of the machine is 25,000 units. Actual usage is as follows: 2008, 5,500 units; 2009, 7,000 units; 2010, 8,000 units; 2011, 4,500 units. (c) Which method used to calculate depreciation on machine B reports the lowest amount of depreciation expense in year 1 (2008)? The lowest amount in year 4 (2011)? The lowest total amount over the 4-year period?
Jerry Grant, the new controller of Blackburn Company, has reviewed the expected useful lives and salvage values of selected depreciable assets at the beginning of 2008. His findings are as follows.
Useful Life in YearsSalvage Value