Soundgarden Company sold 200 copymaking machines in 2008 for $4,000 apiece together with a one year warranty

E13-10 (Warranties) Soundgarden Company sold 200 copymaking machines in 2008 for $4,000 apiece together with a one year warranty. Maintenance on each machine during the warranty period averages $330.

a.) Prepare entries to record the sale of the machines and the related warranty costs, assuming that the accrual method is used. Actual warranty costs incurred in 2008 were $17,000.
b.) Prepare 2008 entries for Crow assuming that the warranties are not an integral part of the sale. Assume that of the sales total, $150,000 relates to sales warranty contracts. Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years. Estimate revenues earned on the basis of costs incurred and estimated costs.

Click here for the solution: Soundgarden Company sold 200 copymaking machines in 2008 for $4,000 apiece together with a one year warranty

The Balboa Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one

The Balboa Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 year, but it can sell it now to another firm in the industry for $265,000. The old machine is being depreciated by $120,000 per year, using the straight line method.

The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $145,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11% and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $255,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC.

a) What is the initial net cash flow if the new machine is purchased and the old one is replaced?
b) Calculate the annual depreciation allowances for both machines, and compute the change in the annual depreciation expense if the replacement is made.
c) What are the incremental net cash flows in Years 1 through 5?
d) Should the firm purchase the new machine? Support your answer.
e) In general, how would each of the following factors affect the investment decision, and how should each be treated?
(1) The expected life of the existing machine decreases.
(2) The WACC is not constant but is increasing as Balboa adds more projects into its
capital budget for the year.

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TLC Corp. is considering purchasing one of two new diagnostic machines

E12-3 TLC Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn't equipped to do. Estimates regarding each machine are provided below.

Machine A Machine B
Original cost $78,000 $190,000
Estimated life 8 years 8 years
Salvage value 0 0
Estimated annual cash inflows $20,000 $40,000
Estimated annual cash outflows $5,000 $9,000

Instructions
Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. Which machine should be purchased?


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On January 1, 2008, Pele Company purchased the following two machines for use in its production process

On January 1, 2008, Pele Company purchased the following two machines for use in its production process.

Machine A: The cash price of this machine was $38,000. Related expenditures included: sales tax $1,700, shipping costs $150, insurance during shipping $80, installation and testing costs $70, and $100 of oil and lubricants to be used with the machinery during its first year of operations. Pele estimates that the useful life of the machine is 5 years with a $5,000 salvage value remaining at the end of that time period. Assume that the straight-line method of depreciation is used.

Machine B: The recorded cost of this machine was $160,000. Pele estimates that the useful life of the machine is 4 years with a $10,000 salvage value remaining at the end of that time period.

Instructions
(a) Prepare the following for Machine A.
(1) The journal entry to record its purchase on January 1, 2008.
(2) The journal entry to record annual depreciation at December 31, 2008.
(b) Calculate the amount of depreciation expense that Pele should record for machine B each year of its useful life under the following assumptions.
(1) Pele uses the straight-line method of depreciation.
(2) Pele uses the declining-balance method. The rate used is twice the straight-line rate.
(3) Pele uses the units-of-activity method and estimates that the useful life of the machine is 125,000 units. Actual usage is as follows: 2008, 45,000 units; 2009, 35,000 units; 2010, 25,000 units; 2011, 20,000 units


Click here for the solution: On January 1, 2008, Pele Company purchased the following two machines for use in its production process