On January 1, 2004, ABC Company purchased equipment for $98,000. The equipment w
ID: 2451605 • Letter: O
Question
On January 1, 2004, ABC Company purchased equipment for $98,000. The equipment was assigned a life of 12 years
and a residual value of $14,000.
On January 1, 2009, ABC Company decided the life of the equipment should be revised from 12 to 15 years.
On January 1, 2014, ABC Company spent $50,000 to completely overhaul the equipment. This overhaul caused ABC
Company to change the life of the equipment from 15 years to 19 years with a residual value at the end of the 19
years of $3,000.
Calculate the book value of the equipment at December 31, 2015 assuming ABC Company employs the straight
line depreciation method.
Explanation / Answer
01.01.2004 : Amount of Depreciation : cost of asset - Residual value/Estimated Economic Life
Amount of Depreciation : 98000 - 14000/12 = 7000
01.01.2009 : Depreciation from 2004 to 2008 = 7000*5 = 35000
Books Value of Equipment : Cost of asset - Amount of Depreciation
: 98000 - 35000 = 63000
Equipment Life revised by Company : 12 years to 15 years
scrap value after 15 years : 14000 (Assume same scrap value as earlier)
balance life of equipment : 15 - 5 = 10 years
Annual Depreciation : 63000 - 14000/10 = 4900
Annual Depreciation from 2009 = 4900
01.01.2014 : Depreciation from 2009 to 2014 = 4900*5 = 24500
Books Value of Equipment : Cost of asset - Amount of Depreciation
98000 - (35000 + 24500) = 38500
Amount of Expenditure : 50000 for completely overhaul, since it increase life of equipment hence we will capitalised this amount with Equipment
hence Actual Book value as on 01.01.2014 : 38500 + 50000 = 88500
Equipment Life revised by Company : 15 years to 19 years
scrap value after 19 years : 3000
balance life of equipment : 19 - 10 = 9 years
Annual Depreciation : 88500 - 3000/9 = 9500
Annual Depreciation from 2014 = 9500
Depreciation for 2014 & 2015 : 9500 for each year
hence book value at 31.12.2015 = 88500 - (9500*2) = $69500
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