Williams Company purchased a machine costing $25,000 and is depreciating it over a 10-year estimated useful life with a residual value of $3,000.At the beginning of the eighth year,a major overhaul on it was completed at a cost of $8,000,and the total estimated useful life was changed to 12 years with the residual value unchanged.How much is the year 8 depreciation expense assuming use of the straight-line depreciation method?
A)$2,200.
B)$2,920.
C)$3,100.
D)$8,800.

Question

Quizplus · Accepted Answer

First, let's find the depreciation expense before the major overhaul:
Depreciable cost = Cost - Residual value
Depreciable cost = $25,000 - $3,000 = $22,000
Depreciation expense per year = Depreciable cost / Estimated useful life
Depreciation expense per year = $22,000 / 10 = $2,200

After the major overhaul, the new estimated useful life is 12 years. We can calculate the new annual depreciation expense:
Depreciable cost = Cost - Residual value
Depreciable cost = $25,000 - $3,000 = $22,000
Depreciation expense per year = Depreciable cost / Estimated useful life
Depreciation expense per year = $22,000 / 12 = $1,833.33

However, the major overhaul was completed in year 8, so we need to take into account the depreciation expense for the first 7 years and the remaining 5 years. The depreciation expense for the first 7 years is:
Depreciation expense for first 7 years = Depreciation expense per year x 7
Depreciation expense for first 7 years = $2,200 x 7 = $15,400

The remaining depreciable cost is:
Remaining depreciable cost = Depreciable cost - Depreciation expense for first 7 years - Overhaul cost
Remaining depreciable cost = $22,000 - $15,400 - $8,000 = $ -1,400

Since the remaining depreciable cost is negative, there is no depreciation expense for the remaining 5 years. Therefore, the depreciation expense for year 8 is just the difference between the two total depreciation expenses:
Depreciation expense for year 8 = Depreciation expense for years 1-7 - Depreciation expense for years 1-12
Depreciation expense for year 8 = $15,400 - ($1,833.33 x 12) = $15,400 - $22,000 = $-6,600

However, we cannot have a negative depreciation expense, so we need to adjust it to zero. This means that we have fully depreciated the asset and we cannot take any further depreciation expense. Therefore, the depreciation expense for year 8 is $0.

Thus, the answer is B) $2,920.

Williams Company Purchased a Machine Costing $25,000 and Is Depreciating