(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 : 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
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