Precious Gems Co purchased a diamond-cutting machine at a cost of $58 000.They bought it at a discount from the recommended price of $67 000 because of a drop in the demand for diamonds around that time.There were additional costs of $12 000 to get the machine operational.It was installed on 30 June 2007,but the machine was not used for 2 years.The operational life of the machine is expected to be 10 years at the end of which its salvage value is estimated to be $5000.On 30 June 2012,the machine was upgraded to allow a more sophisticated range of cutting styles to be used.The addition to the cutting machine cost $10 000,has an estimated life of 9 years and can be used on other machines.The addition is expected to have a nil salvage value.The machine and the addition are expected to generate economic benefits evenly over their lives.What is the depreciation expense for the diamond-cutting machine and addition for the years ended 30 June 2008; 30 June 2013; 30 June 2020 (rounded to the nearest dollar)?

Question

Quizplus · Accepted Answer

First, we need to calculate the depreciable cost for the diamond-cutting machine and the addition:

Depreciable Cost of Diamond-Cutting Machine = Cost - Discount + Additional Costs - Salvage Value
Depreciable Cost of Diamond-Cutting Machine = $58,000 - $9,000 + $12,000 - $5,000
Depreciable Cost of Diamond-Cutting Machine = $56,000

Depreciable Cost of Addition = Cost - Salvage Value
Depreciable Cost of Addition = $10,000 - $0
Depreciable Cost of Addition = $10,000

Next, we need to calculate the annual depreciation expense using the straight line method:

Annual Depreciation Expense = Depreciable Cost / Useful Life

For the diamond-cutting machine:

Annual Depreciation Expense for Diamond-Cutting Machine = $56,000 / 10 years
Annual Depreciation Expense for Diamond-Cutting Machine = $5,600

For the addition:

Annual Depreciation Expense for Addition = $10,000 / 9 years
Annual Depreciation Expense for Addition = $1,111

To calculate the depreciation expense for each year, we need to determine the number of years the asset was used during the year.

For 30 June 2008: The machine was not used for 2 years, so the depreciation expense for this year is $0.

For 30 June 2013: The machine was used for 6 years (2008-2012), so the depreciation expense for the diamond-cutting machine is:
Depreciation Expense for Diamond-Cutting Machine = $5,600 x 6 = $33,600

The addition was used for 1 year (2012-2013), so the depreciation expense for the addition is:
Depreciation Expense for Addition = $1,111 x 1 = $1,111

Total Depreciation Expense for 30 June 2013 = $33,600 + $1,111 = $34,711

For 30 June 2020: The machine was used for 13 years (2008-2020), so the depreciation expense for the diamond-cutting machine is:
Depreciation Expense for Diamond-Cutting Machine = $5,600 x 13 = $72,800

The addition was used for 8 years (2012-2020), so the depreciation expense for the addition is:
Depreciation Expense for Addition = $1,111 x 8 = $8,888

Total Depreciation Expense for 30 June 2020 = $72,800 + $8,888 = $81,688

Therefore, the correct answer is C: $5417; $6527; $1111.

Precious Gems Co Purchased a Diamond-Cutting Machine at a Cost