Question

On January 3, 2013, Hippo Corp. purchased a machine for $600,000. The machine was being depreciated...

On January 3, 2013, Hippo Corp. purchased a machine for $600,000. The machine was being depreciated using the straight-line method over an estimated useful life of ten years, with no residual value. At the beginning of 2020, the company paid $150,000 to overhaul the machine. As a result of this improvement, the company estimated that the useful life of the machine would be extended an additional five years (15 years total). The depreciation expense for 2020 should be

a. $41,250. b. $50,000. c. $60,000. d. $66,000.

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Answer #1

Answer :

Purchase price of Machine on January 3, 2013 = $600,000

Useful life = 10 years

Salvage Value = Nil

Straight line method of depreciation is used

Depreciation for 1 year = $600,000 / 10 = $60,000

Depreciation charged Upto January 2020 = $60,000 x 7 = $420,000

Book Value of Machine on January 2020 = $600,000 - $420,000 = $180,000

Amount paid to overhaul the machine = $150,000

Total book Value of Machine on January 2020 = $180,000 + $150,000 = $330,000

Remaining Useful Life of Machine = 8 years

Depreciation expense for 2020 = $330,000 / 8 = $41,250

So, Correct Option is (a) 41,250

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