Klm company purchased a mixer machine on january 2, 2018 for 14,500

General
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klm company purchased a mixer machine on january 2, 2018 for 14,500

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Depreciation of a Mixer Machine

KLM Company’s Mixer Machine Acquisition
KLM Company purchased a mixer machine on January 2, 2018, for $14,500. Understanding the financial impact of this purchase requires analyzing how the value of this machine depreciates over time.

1. Understanding Depreciation
Depreciation is the gradual reduction in the value of a tangible asset over its useful life. For KLM Company’s mixer machine, several factors influence depreciation, including the cost of the machine, its useful life, and salvage value.

2. Factors of Depreciation

  • Initial Cost: The mixer machine cost $14,500.
  • Useful Life: This is the expected duration the asset will be operational and beneficial to the company. For machinery, this can typically range from 5 to 10 years, depending on the type.
  • Salvage Value: This is the estimated residual value of the machine at the end of its useful life.
  • Depreciation Method: Various methods include the straight-line method, declining balance method, and units of production method.

3. Depreciation Calculation Methods
Let’s explore how each depreciation method would impact the value of KLM’s mixer machine:

Straight-Line Depreciation

The straight-line method spreads the cost of the asset evenly across its useful life.

[ \text{Depreciation Expense} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}} ]

For example, if the useful life of the mixer is 5 years and its salvage value is $500, the annual depreciation expense is calculated as follows:

[
\text{Depreciation Expense} = \frac{14,500 - 500}{5} = 2,800
]

4. Recording Depreciation

  • Journal Entry: Each year, an accountant must record the depreciation expense:
    [
    \text{Debit: Depreciation Expense} = 2,800
    ]
    [
    \text{Credit: Accumulated Depreciation} = 2,800
    ]

Declining Balance Method

This method applies a constant rate of depreciation to the declining book value of the asset each year.

  • Double Declining Balance Rate: A common form of declining balance uses double the straight-line rate.
  • Assume a 20% rate for a 5-year life span.

5. Application

  • Year 1:
    [ 14,500 \times 0.20 = 2,900 ]

  • Year 2:
    [ (14,500 - 2,900) \times 0.20 = 2,320 ]

  • Continue this calculation for subsequent years.

Units of Production Method

This method bases depreciation on the asset’s usage, often in terms of hours or units produced.

  • Formula:
    [
    \text{Depreciation per Unit} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Total Estimated Production}}
    ]

6. Understanding the Impact
Depreciation affects the company’s financial statements, particularly the balance sheet and income statement:

  • Income Statement: Depreciation is an expense, reducing taxable income.
  • Balance Sheet: Accumulated depreciation reduces the book value of assets.

7. Tax Implications
Depreciation methods can impact taxable income, and businesses may choose methods that maximize tax efficiency:

  • Corporate Strategies: Companies might opt for more accelerated depreciation for immediate tax benefits.

Summary
KLM Company’s purchase of the mixer machine for $14,500 on January 2, 2018, required careful consideration of depreciation methods to manage financial reporting and tax obligations efficiently. Depreciation methods like straight-line, declining balance, and units of production help spread the asset cost over time, ensuring accurate financial representation of asset value. Understanding these concepts enables KLM to make informed accounting decisions benefiting long-term fiscal health. @anonymous4