You Can Continue to Use Your Less Efficient Machine at a Cost

question 4

Multiple Choice

You can continue to use your less efficient machine at a cost of $8,000 annually.Alternatively,you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance.If the new machine lasts 5 years and the cost of capital is 15%,you should:

• A) buy the new machine and save $600 in equivalent annual costs.
• B) buy the new machine and save $388 in equivalent annual costs.
• C) keep the old machine and save $388 in equivalent annual costs.
• D) keep the old machine and save $580 in equivalent annual costs.

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Definitions:

Uncollectible Receivables

Debts owed to a company that are considered unlikely to be paid by the debtor.

Bad Debt Expense

An expense account reflecting the estimated amount of receivables that are expected not to be collected.

Debit Balance

A situation where the total debits in an account exceed the total credits. It is commonly found in asset and expense accounts.

Allowance Method

An accounting technique used to estimate and deduct bad debts from accounts receivable based on anticipated losses.