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30 October, 18:42

Gates Co. purchased machinery on January 2, 2005, for $440,000. The straight-line method is used and useful life is estimated to be 10 years, with a $40,000 residual value.

At the beginning of 2011 Gates spent $96,000 to overhaul the machinery. After the overhaul, Gates estimated that the useful life would be extended 4 years (14 years total), and the residual value would be $20,000.

The depreciation expense for 2011 should be:

a. $28,250.

b. $34,500.

c. $40,000.

d. $37,000.

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  1. 30 October, 18:44
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    b. $34,500

    Explanation:

    For computing the depreciation expense for 2011, first we have to do the following calculations which are shown below:

    Depreciation expense under Straight-line method would be

    = (Purchase value of machinery - residual value) : (estimated useful life)

    = ($440,000 - $40,000) : (10 years)

    = $400,000 : 10 years

    = $40,000

    From January 2, 2005 to the beginning of 2011, it have 6 years so the accumulated depreciation would be

    = $40,000 * 6 years

    = $240,000

    And, the book value would be

    = Purchase value of machinery - accumulated depreciation

    = $440,000 - $240,000

    = $200,000

    Now the depreciation expense for 2011 would be

    = (Book value + spent amount - salvage value) : (remaining life)

    = ($200,000 + $96,000 - $20,000) : (8 years)

    = $276,000 : 8 years

    = $34,500

    Total years is 14 and the accumulated depreciation year is 6 years so, the remaining year would be 8 years
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