Entity Alpha acquires equipment on January 1, 2021. Information on costs is as follows:Purchase Price, gross of trade discount 1,000,000Trade discount available 10,000Freight Costs 20,000Testing Costs 30,000Net disposal proceeds of samples generated during testing 5,000How much is the initial cost of the equipment? The equipment has an estimated useful life of 10 years and a residual value of ₱200,000. Entity A uses the straight line method of depreciation. How much is the carrying amount of the equipment on December 31, 2023?
Question
Entity Alpha acquires equipment on January 1, 2021. Information on costs is as follows:Purchase Price, gross of trade discount 1,000,000Trade discount available 10,000Freight Costs 20,000Testing Costs 30,000Net disposal proceeds of samples generated during testing 5,000How much is the initial cost of the equipment? The equipment has an estimated useful life of 10 years and a residual value of ₱200,000. Entity A uses the straight line method of depreciation. How much is the carrying amount of the equipment on December 31, 2023?
Solution
To calculate the initial cost of the equipment, we need to add up all the costs associated with acquiring the equipment and getting it ready for use. This includes the purchase price, freight costs, and testing costs. However, we also need to subtract any trade discounts and net disposal proceeds of samples generated during testing.
Here's how you calculate it:
- Start with the gross purchase price: 1,000,000
- Subtract the trade discount: 1,000,000 - 10,000 = 990,000
- Add the freight costs: 990,000 + 20,000 = 1,010,000
- Add the testing costs: 1,010,000 + 30,000 = 1,040,000
- Subtract the net disposal proceeds of samples generated during testing: 1,040,000 - 5,000 = 1,035,000
So, the initial cost of the equipment is 1,035,000.
Next, to calculate the carrying amount of the equipment on December 31, 2023, we need to calculate the depreciation for each year and subtract it from the initial cost.
Entity A uses the straight-line method of depreciation, which means the value of the equipment decreases by the same amount each year. The formula for straight-line depreciation is (Initial Cost - Residual Value) / Useful Life.
- Calculate the annual depreciation: (1,035,000 - 200,000) / 10 = 83,500
- Calculate the total depreciation for 3 years (from January 1, 2021, to December 31, 2023): 83,500 * 3 = 250,500
- Subtract the total depreciation from the initial cost: 1,035,000 - 250,500 = 784,500
So, the carrying amount of the equipment on December 31, 2023, is 784,500.
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