Question

(Detailed Explanation Please)

On January 1, Year 2, Ballard Company spent $12,000 on an asset to improve its quality. The asset had been purchased on January 1, Year 1, for $38,000. The asset had a $6,800 salvage value and a 6-year life. Ballard uses straight-line depreciation. What would be the book value of the asset on January 1, Year 5?

Multiple Choice

• $15,600.

• $15,200.

• $7,600.

• $22,000.

Answer 1

Answer : Option D, $22,000

Explanation :

Using Straight Line method:

Annual Depreciation = (Cost – Salvage value)/ No of Years

Annual Depreciation = (38,000 – 6,800) / 6

Annual Depreciation for year 1 = $ 5,200

Book Value of Equipment when additional amount was spent = (38,000 – 5,200) = $ 32,800

Revised Book Value after improving the quality = $32,800 + $12,000 = $ 44,800

Revised life of asset = 5 years

New Annual Depreciation Expenses = (44,800 – 6,800) / 5

New Annual Depreciation Expenses = $ 7,600

Depreciation expenses for 3 years(year 2 to year 4)= $ 7,600 * 3 = $ 22,800

Therefore, the book Value of asset as on January 01, year 5 = ($44,800 – $22,800) = $ 22,000