Smith Industries Is Considering Replacing a Machine That Is Presently

question 144

Multiple Choice

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available: $\begin{array}{|l|r|r|}\hline & \text { Old Machine } & \begin{array} { l } \text { Replacement } \\\text { Machine }\end{array} \\\hline \text { Original cost } & \$ 45,000 & \$ 35,000 \\\hline \text { Remaining useful life in years } & 5 & 5 \\\hline \text { Current age in years } & 5 & 0 \\\hline \text { Book value } & \$ 25,000 & \\\hline \text { Current disposal value in cash } & \$ 8,000 & \\\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0 \\\hline \text { Annual cash operating costs } & \$ 7,000 & \$ 4,000 \\\hline\end{array}$ Which of the information provided in the table is irrelevant to the replacement decision?

• A) the price of the new machine
• B) the original cost of the old machine
• C) the current disposal value of the old machine
• D) annual operating costs

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Definitions:

Recording Business Transactions

The process of documenting the financial activities of a business in accounting records according to established principles.

Operating Cycle

Average time it takes to buy and sell merchandise and then collect accounts receivable.

Financial Statements

Financial statements are formal records that outline the financial activities and condition of a business, entity, or individual, encompassing the balance sheet, income statement, and cash flow statement.

General Journal

The primary bookkeeping record in double-entry accounting, used to record all transactions by date, before they are posted to individual accounts in the general ledger.