Maria Young is the sole stockholder of Purl of Great Price Company (POGP Company), which produces high-end knitted sweaters and sweater vests for sale to retail outlets. The company started in January of the curent year and employs three knitters (each of whiom work 40 nours per week) and one office managerikntting supervisor this employee works 20 hours per week as ofmice manager, and 20 hours per week as knitting supervison) All wages are paid in cash at the end of each month. Each knitter has a knitting machine that is used about 2/3 of the kniters time, the rest of the knitter’s time being involved in hand knitting and piecing together the garments. The company also has a packaging machine used to wrap the garments in plastic for shipping, which is operated by the office manager/knitting supervisor approximately 5 hours per week The knitting machines were purchased on January 1 of the current year, and cost $2,400 each, with an anticipated useful life of 10 years and no salvage value. The packaging machine was purchased on the same date and cost $4,800, with the same anticipated useful life and salvage value
The Correct Answer and Explanation is :
To calculate depreciation for the knitting and packaging machines, we will use the straight-line method, as the machines have no salvage value and their useful lives are given.
Straight-Line Depreciation Formula:
[
\text{Depreciation Expense per Year} = \frac{\text{Cost of Asset} – \text{Salvage Value}}{\text{Useful Life}}
]
- Knitting Machines:
- Cost: $2,400
- Salvage Value: $0
- Useful Life: 10 years [
\text{Depreciation per Year} = \frac{2,400 – 0}{10} = 240 \, \text{per year}
] Since we are looking at the first month (January), the depreciation for one month will be:
[
\text{Monthly Depreciation} = \frac{240}{12} = 20
]
The depreciation expense for each knitting machine for January is $20. Since there are three knitting machines, the total depreciation for the knitting machines is:
[
20 \times 3 = 60
]
- Packaging Machine:
- Cost: $4,800
- Salvage Value: $0
- Useful Life: 10 years [
\text{Depreciation per Year} = \frac{4,800 – 0}{10} = 480 \, \text{per year}
] The monthly depreciation for the packaging machine is:
[
\text{Monthly Depreciation} = \frac{480}{12} = 40
]
Thus, for the first month, the depreciation is:
- Knitting Machines: $60
- Packaging Machine: $40
Explanation:
In the case of both machines, we used the straight-line depreciation method, which allocates an equal amount of depreciation each year over the asset’s useful life. The cost of each machine is divided by the number of years they are expected to last, which gives the annual depreciation. Dividing this by 12 gives the monthly depreciation expense. This is a standard way of allocating the cost of assets over time, ensuring that expenses related to the usage of the machines are accounted for accurately in the company’s financial statements.
The total depreciation for January (for all machines) is $60 (knitting machines) + $40 (packaging machine) = $100.
This depreciation should be recorded in the company’s financial records to reflect the use and wear on the assets over time.