[donnychristal]

I have this question on F4.

On Jan 2 of the current year, Lem Corp. bought machinery under a contract that required a down payment of $10,000, plus 24 monthly payments of $5,000 each, for total cash payment of $130,000. The cash equivalent price of the machinery was $110,000. The machinery has an estimated useful life of ten year and estimated salvage value of $5,000. Lem uses straight-line depreciation. In its year-end statement, what amount should Lem report as depreciation for this machinery?

A. $12,500

B. $13,000

C. $10,500

D. $11,000

the answer is C and it explained ‘depreciation calculations should be based on fair market value less salvage value’. But shouldn’t depreciation taken on cost minus salvage value??

Thanks!!

FAR - 75
AUD - 64/71
BEC - 85

[MaLoTu]

The question is telling you the cash-equivalent, which is also the market value and in this case is likely your book value is $110,000. We cannot go off of the sum of the payments because they might contain interest (I assume interest accounts for the dollar amount variance) the question just states the payment amount and no further details that would help.

[Author]

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