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Marizza181 [45]
3 years ago
11

On January 1, 2016, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also paid $1,000 for transportation and insta

llation. The expected useful life of the machine is 6 years and the residual value is $5,000. How much is the annual depreciation expense assuming use of the straight-line depreciation method? a. $6, 100. b. $6,000. c. $5, 950. d. $5, 750
Business
1 answer:
Margaret [11]3 years ago
8 0

Answer:

b. $6,000

Explanation:

Depreciation is calculated on the cost of asset. Cost of asset includes the transportation and installation cost, because both are necessary in order to function the asset.

Accordingly total cost of asset = $40,000 + $1,000 = $41,000

Salvage value = $5,000

Thus, amount to be depreciated = $41,000 - $5,000 = $36,000

Useful life of the asset = 6 years

Straight line depreciation = $36,000/6 = $6,000 annually.

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Premium is $2,677.95

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Explanation:

In order to arrive at the premium on the bond,it is necessary to compute the issuing price of the bond,which can be done using the pv formula in excel as shown below:

=-pv(rate,nper,pmt,fv)

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pmt is the semi-annual coupon payable by the  bond i.e 12%/2*$6000=$360

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=-pv(3%,20,360,6000)

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premium=$$8,677.95-$6,000

premium=$2,677.95

The premium amortization is the excess of coupon payment  over the interest expense.

In the attached, I calculated the premium amortization on the 7th payment.

I started by taking the issue price of $8677.95 ,added interest expense at 3% semi-annually ,deducted the coupon payment of $360,thereby leaving the outstanding balance at end of the year.

Note that the premium amortization is the excess of coupon payment over interest expense as colored coded.

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