Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $ 5 million to buy the machine and $ 12 comma 000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $ 3 million. The machine is expected to have a working life of seven years. If straight-line depreciation is used, what are the yearly depreciation expenses in this case

the yearly depreciation expenses are $ 1, 144,571.43

Explanation:

First determine the Cost of the PPE

in terms of IAS 16, the cost of a PPE item includes the Purchase Price and any direct costs related to placing the asset in the condition and location intended for use by management.

Cost of the PPE item

Purchase Price                                   $ 5,000,000

Add Delivery and Installation Costs         $12,000

Add Building Costs                            $ 3,000,000

Total Cost                                             $8,012,000

Then Calculate the Depreciation

Depreciation on Straight Line = Cost/Useful Life

                                                 = $8,012,000 / 7 years

                                                 = $ 1, 144,571.43

in this case we must divide the amount of depreciation that corresponds to the machine = $716,000 per year, and the depreciation expense that corresponds to the clean room as a qualified improvement = $109,091 per year.

Explanation:

the cost basis of the machine = $5,000,000 + $12,000 (installation costs) = $5,012,000 / 7 years (straight line depreciation) = $716,000

the clean room cost basis = $3,000,000 / 27.5 years (useful life) = $109,091 using straight line depreciation for buildings since it is considered a qualified improvement