Problem - Financial statement classification
Wayside Machine Tool Company purchased a $600,000 welding machine to use in production of large machine tools and robots. The welding machine was expected to have a life of 10 years and a salvage value at time of disposition of $60,000. The company uses straight-line depreciation. During its first operating year, the machine produced 600 machines of which 480 were sold.
a. What part of the $600,000 machine cost expired?
b. Where would each of the amounts related to this machine appear on the financial statements at the end of the first year of operations?
The objective of this exercise is to determine the financial statement classification of this cost.
This requires you to allocate the cost appropriately. Part of the cost is expired and part is not.
The expired portion will be included in the cost of goods sold while the unexpired portion is still part of the finished goods inventory.