Revision Of Depreciation On January 1, 2017, Slade Inc Purch
Revision Of Depreciationon January 1 2017 Slade Inc Purchased A Mac
Revision of Depreciation On January 1, 2017, Slade Inc. purchased a machine for $90,000. Slade depreciated the machine with the straight-line depreciation method over a useful life of 10 years, using a residual value of $4,000. At the beginning of 2019, a major overhaul, costing $35,000, was made. After the overhaul, the machine's residual value is estimated to be $2,500, and the machine is expected to have a remaining useful life of 12 years. Required: Determine the depreciation expense for 2019.
Paper For Above instruction
The calculation of depreciation expense for the year 2019, following a significant overhaul to the machinery acquired by Slade Inc., necessitates a detailed review of the depreciation methods and adjustments to asset valuation. This process involves understanding the initial depreciation calculations, accounting for the overhaul expenditure, re-estimating the residual value and useful life, and finally determining the annual depreciation expense based on the updated information.
Initial Acquisition and Depreciation Calculation (2017-2018)
Slade Inc. purchased the machine on January 1, 2017, at a price of $90,000. The depreciation was calculated using the straight-line method over an estimated useful life of 10 years, with a salvage (residual) value of $4,000 at the end of its useful life. The annual depreciation expense was computed as follows:
\[
\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} = \frac{90,000 - 4,000}{10} = 8,600
\]
This depreciation expense was recognized yearly for 2017 and 2018, resulting in accumulated depreciation of $17,200 by the end of 2018. The book value at the beginning of 2019 was therefore:
\[
\text{Book Value} = \text{Cost} - \text{Accumulated Depreciation} = 90,000 - 17,200 = 72,800
\]
Impact of the Overhaul in 2019
In 2019, a major overhaul costing $35,000 was performed. Under accounting standards, the costs of major overhauls that extend the useful life or improve the asset’s condition are capitalized. Therefore, the book value of the asset increases by the overhaul cost:
\[
\text{Adjusted Book Value} = \text{Previous Book Value} + \text{Overhaul Cost} = 72,800 + 35,000 = 107,800
\]
However, this new total must be reassessed against the updated residual value and remaining useful life. After the overhaul, the residual value is estimated at $2,500, and the remaining useful life is 12 years, indicating a need to recalibrate depreciation for the future periods.
Re-Estimation of Depreciation Post-Overhaul
The revised depreciation expense, for each remaining year of useful life, is calculated based on the new book value and updated residual value:
\[
\text{Depreciable Amount} = \text{Adjusted Book Value} - \text{Residual Value} = 107,800 - 2,500 = 105,300
\]
\[
\text{Annual Depreciation Expense} = \frac{\text{Depreciable Amount}}{\text{Remaining Useful Life}} = \frac{105,300}{12} \approx 8,775
\]
Depreciation Expense for 2019
Since depreciation is calculated on an annual basis, and the overhaul occurred at the beginning of 2019, the depreciation expense for 2019 will reflect this new depreciation basis:
\[
\boxed{\text{Depreciation Expense for 2019} \approx \$8,775}
\]
Conclusion
The depreciation expense for the year 2019, considering the overhaul, is approximately $8,775. This adjustment ensures that the depreciation reflects the revised condition and remaining useful life of the asset. Accurate depreciation accounting is essential for financial statement accuracy and asset management, aligning the expense recognition with the asset's consumption and value over its useful life.
References
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