Question

On January 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 payments of $130,000. The cash equivalent price of the machinery was $110,000. The machinery has an estimated useful life of ten years and estimated salvage value of $5,000. Lem uses straight-line depreciation. In its year-end income statement, what amount should Lem report as depreciation for this machinery?

The answer is $10,500. I get that. If your total cash payments are 130,000, what happens to the extra 20,000 of payments you have to make?

Answer 1

service life of 10 years

depreciation rate per year

$n=\frac{1}{10}=0.1$

depreciation per year

$110000\times0.1=11000$

20,000 - this can be a reduction in cost due to an emergency assessment, inflation, etc.