Question

Swifty Corporation purchased equipment in January of 2011 for $405000. The equipment was being depreciated on the straight-line method over an estimated useful life of 20 years, with no salvage value. At the beginning of 2021, when the equipment had been in use for 10 years, the company paid $54000 to overhaul the equipment. As a result of this improvement, the company estimated that the useful life of the equipment would be extended an additional 5 years. What will be the depreciation expense recorded for this equipment in 2021?

Answer 1

Solution :

Step 1 :

Depreciation expense per year from 2011 to 2020:

= initial cost of the equipmement / useful life in years

= $ 405,000 / 20 years

= $ 20,250

Step 2 :

Total depreciation for initial 10 years from 2011 to 2020 :

= 10 years * $ 20,250 per year

= $ 202,500

Step 3:

Written down value of equipment in the beginning of year 2021

= initial cost - depreciation for the first 10 years

= $ 405,000 - $ 202,500

= $ 202,500

Step 4 :

Depreciation for the year 2021:

= ( written down value at begining of year 2021 + cost of improvement ) / remaining useful life in years

= ( $ 202,500 + 54,000 ) / ( 10 + 5 )

= $ 256,500 / 15

= $ 17,100

Answer : depreciation expense recorded for the equipment for year 2021 will be $17,100

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