Reference no: EM132148314

Question - Computing a Basket Purchase Allocation, and Recording Depreciation under Three Alternative Methods

At the beginning of the year, Wong's Martial Arts Centre bought three used fitness machines from Hangar Inc. for a total cash price of $38000. Transportation costs on the machines were $2000. The machines were immediately overhauled and installed, and started operating. The machines were different; therefore, each had to be recorded separately in the accounts. An appraiser was requested to estimate their market value at the date of purchase (prior to the overhaul and installation). The carrying amounts shown on Hangar's books are also available. The carrying amounts, appraisal results, installation costs, and renovation expenditures are below:

Machine A Machine B Machine C

Carrying amount on Hangar's books $8000 $29000 $6000

Appraisal value $9500 $32000 $8500

Installation costs $300 $500 $1200

Renovation costs prior to use $2000 $400 $600

By the end of the first year, each machine had been operating 8000 hours.

Required:

1. Compute the cost of each machine by making a supportable allocation of the total cost to three machines. Explain the rationale for the allocation basis used

2. Prepare the entry to record depreciation expense at the end of year 1, assuming the following:

Estimates

Machine Life Residual Value Depreciation Method

A 5 years $1500 Straight Line

B 40000hours 900 Units of production

C 4 years 2000 Double declining balance