On January 1,Year 1,Eller Company purchased an asset that had cost $24,000.The asset had an 8-year useful life and an estimated salvage value of $1,000.Eller depreciates its assets on the straight-line basis.On January 1,Year 5,the company spent $6,000 to improve the quality of the asset.How does the Year 5 depreciation expense impact the elements of the financial statements?

Question

Quizplus · Accepted Answer

Annual depreciation expense for Years 1 through 4 = (Cost of $24,000 - Salvage value of $1,000)÷ 8 years = $2,875
Book value at end of Year 4 = Cost of $24,000 -Accumulated depreciation of ($2,875 per year × 4 years)= $12,500
Annual depreciation expense for Years 5 through Year 8 = (Book value of $12,500 + Expenditure of $6,000 - Salvage value of $1,000)÷ Remaining years of 4 = $4,375
Recognizing the new depreciation expense decreases assets (by increasing accumulated depreciation,a contra asset account)and stockholders' equity (retained earnings)by $4,375.It also increases expenses (depreciation expense)and decreases net income by that amount.

On January 1,Year 1,Eller Company Purchased an Asset That Had