On January 1, 2019, Betty DeRose, Inc. purchased machinery for $160,080 The mach
ID: 2566102 • Letter: O
Question
On January 1, 2019, Betty DeRose, Inc. purchased machinery for $160,080 The machine was assigned a life of sixteen years and a residual value of $12,000. On January 1, 2025, Betty DeRose spent $40,000 to completely overhaul the machine. This overhaul caused Betty to change the life of the machine from 16 years to 22 years with a residual value at the end of the 22 years being equal to $6,500. Assume Betty DeRose is using the straight-Line method to depreciate the machine. Calculate the book value of the machinery at December 31, 2029. Do not use decimals in your answerExplanation / Answer
Solution:
Book Value of Asset at Dec 31, 2029 = Cost of the Asset – Accumulated Depreciation till Dec 31, 2029
The problem is related to the extension of the estimated life of Property Plant and Equipment and treatment of depreciation in relation to the extension of useful life of asset.
Since the company spent $40,000 to completely overhaul the machine. The expenses which are incurred on the Assets and extend the useful life of Asset is to be capitalzed. So the Overhaul Expenses $40,000 to be capitalized in the Value of Asset as on Jan 01, 2025 and from this date we need to calculate the revised depreciation .
First of all we need to find out the Accumulated Depreciation and Book Value of Asset at Dec 31, 2024 just before the Overhaul expenses.
Cost of Asset = $160,000
Estimated Useful Life (as on jan 1, 2019) = 16 years
Salvage Value = $12,000
Annual Straight line depreciation = (Cost of Asset – Salvage Value) / Estimated Useful life
= (160,000 – 12,000) / 16
= $9,250
Number of Years the asset used before the overhaul expense = 6 years
Accumulated Depreciation at Dec 31, 2024 (6 years) = $9,250*6 = $55,500
Book Value of Asset at Dec 31, 2014 = Cost of Asset 160,000 – Accumulated Depreciation $55,500 = $104,500
From Jan 1, 2025 the estimated useful life changed and the overhaul expenses to be capitalized in the value of asset and will be depreciation over the revised remaining useful life of asset.
Revised Estimated Useful life of asset = 22 year
Asset already used = 6 year
Remaining Useful life = 22 – 6 = 16
Revised Salvage Value = $6,500
Book Value of Asset as on Jan 01, 2025 = 104,500 + Overhaul Expenses $40,000 = $144,500
Annual Depreciation from Jan 01, 2025 = (Book Value of Asset as on Jan 01, 2025 – Revised Salvage Value) / Revised Remaining useful life
= ($144,500 – 6,500) / 16
= $8,625
Calculation of Total Accumulated Depreciation at Dec 31, 2029
Year
$$
2019
Annual Depreciation
$9,250
2020
Annual Depreciation
$9,250
2021
Annual Depreciation
$9,250
2022
Annual Depreciation
$9,250
2023
Annual Depreciation
$9,250
2024
Annual Depreciation
$9,250
2025
Revised Annual Depreciation
$8,625
2026
Revised Annual Depreciation
$8,625
2027
Revised Annual Depreciation
$8,625
2028
Revised Annual Depreciation
$8,625
2029
Revised Annual Depreciation
$8,625
Accumulated Depreciation at Dec 31, 2029
$98,625
Book Value of Machinery at Dec 31, 2029 = Original Cost + Overhaul Expense – Accumulated Depreciation till Dec 31, 2029
= $160,000 + $40,000 - $98,625
= $101,375
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Year
$$
2019
Annual Depreciation
$9,250
2020
Annual Depreciation
$9,250
2021
Annual Depreciation
$9,250
2022
Annual Depreciation
$9,250
2023
Annual Depreciation
$9,250
2024
Annual Depreciation
$9,250
2025
Revised Annual Depreciation
$8,625
2026
Revised Annual Depreciation
$8,625
2027
Revised Annual Depreciation
$8,625
2028
Revised Annual Depreciation
$8,625
2029
Revised Annual Depreciation
$8,625
Accumulated Depreciation at Dec 31, 2029
$98,625