On January 1, 2007, ABC Company purchased equipment for $145,000. The equipment
ID: 2372768 • Letter: O
Question
On January 1, 2007, ABC Company purchased equipment for $145,000. The equipment was assigned a life of 12 years and a $13,000 residual value. On January 1, 2011, ABC Company overhauled the equipment. This capital expenditure caused ABC Company to change the life of the equipment from 12 years to 20 years with a residual value at the end of the 20 years equal to $8,000. Assume ABC Company employs the straight-line depreciation method. ABC Company reported accumulated depreciation related to this equipment of $72,500 at December 31, 2014. Calculate the amount ABC Company spent to overhaul the equipment.Explanation / Answer
(145,000 - 13,000) / 12 = $11,000 annual depreciation expense for first four years
11,000 x 4 = $44,000 accumulated depreciation after first four years.
145,000 - 44,000 = $101,000 book value after first four years.
72,500 - 44,000 = $28,500 accumulated depreciation for next four years.
28,500 / 4 = $7,125 new annual depreciation expense.
With the new useful life of the equipment being 20 years, there are now 16 years remaining to depreciate.
7,125 x 16 = $114,000 remaining to depreciate
114,000 + 44,000 = 158,000 total accumulated depreciation
158,000 + 8,000 new salvage value = $166,000
166,000 - 145,000 = $21,000 amount to overhaul the equipment
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