Question

A company purchased a machine for $75,000 that was expected to last 6 years and have no salvage value. At the beginning of the machine's fourth (4th) year the company spent $20,000 in betterments that increased the machine's production capacity. Straight-line depreciation was used throughout the machine's 6 years of useful life. Calculate the depreciation expense for the fourth full year of the machine's useful life. (10 pts) (Note: The cost of the betterment increases the book value before recalculating the new depreciation.) Show all work!

Answer 1

Straight-line equation: (Original Cost - Salvage Value) / Estimated Useful Life

From the given information :

Annual Depreciation Expense: 75,000-0/6

= 12,500

In the beginning of 4 th year the company spent $20,000 in betterments that increased the machine's production capacity, so it should be capitalised and should be depreciated using straight line depreciation for the remaining life that is for 3 years

Depreciation expense = 20,000/3 = 6667

Total depreciation expense for year 4 = 12,500+6667

= $ 19,167