A company bought a new machine for its warehouse on January 1

A company bought a new machine for its warehouse on January 1

a. Paid $10,000 in CASH

b. Financed THE REST of the purchase price via a $30,000 5-Year note

c. Incurred a SEPERATE $2,000 setup charge

d. Monthly depreciation is $500 ($6,000 annual).
What’s the book value of the new machine ON December 31?

The correct answer and explanation is:

Book Value of the New Machine on December 31

Answer: $34,000

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Explanation:

1. Initial Costs of the Machine
   The total cost of acquiring the machine includes:
   • Purchase Price: $40,000 (Paid $10,000 in cash and financed $30,000 via a note)
   • Setup Charge: $2,000 (separately incurred and necessary to make the machine operational)
   Total Initial Cost: $40,000 + $2,000 = $42,000
2. Accumulated Depreciation by December 31
   Depreciation reflects the usage or wear-and-tear of the machine over its useful life.
   • Annual Depreciation: $6,000
   • Monthly Depreciation: $500
   For the year ending December 31, the machine has been in use for 12 months:
   $500 × 12 = $6,000 Accumulated Depreciation by Year-End: $6,000
3. Book Value Calculation
   The book value of an asset is calculated as:
   Book Value = Initial Cost – Accumulated Depreciation Substituting the values:
   Book Value = $42,000 – $6,000 = $36,000
4. Understanding Depreciation’s Impact
   • Depreciation spreads the cost of the machine over its useful life, reducing the book value each year.
   • Even though the machine’s functionality remains unchanged, its recorded value decreases due to this accounting treatment.
5. Key Insights
   • The cash and financing breakdown ($10,000 cash, $30,000 note) impacts liquidity and liability but not the book value.
   • The setup cost adds to the machine’s initial cost as it is necessary for operation.

Thus, on December 31, the book value of the machine is $36,000.