On January 1, 2014, the Master Company purchased a machine for $36,000 that had a ten-year estimated useful life and no estimated salvage value. At the start of the seventh year of use, a new energy saving device was added to the machine that extended its original useful life an additional two years. This change should be accounted for in the seventh year by
A) including the cumulative effect of the change in net income for the current period
B) depreciating the remaining book value over four years
C) retroactively adjusting income of prior periods using the newly adjusted useful life
D) depreciating the remaining book value over six years

Question

Quizplus · Accepted Answer

When an asset's useful life is extended, the remaining book value should be depreciated over the remaining useful life. Since the original estimated useful life was ten years, and the machine was extended an additional two years, the remaining useful life would be six years (10 - 7 + 2). Therefore, the remaining book value ($36,000 - accumulated depreciation) should be depreciated over six years instead of the original four years. Option D is the only answer choice that suggests depreciating the remaining book value over six years, which is the correct method of accounting for this change in useful life.

On January 1, 2014, the Master Company Purchased a Machine