Marsh Corporation purchased a machine on July 1, 2012, for $1,250,000. The machine was estimated to have a useful life of 10 years with an estimated salvage value of $70,000. During 2015, it became apparent that the machine would become uneconomical after December 31, 2019, and that the machine would have no scrap value. Accumulated depreciation on this machine as of December 31, 2014, was $295,000. What should be the charge for depreciation in 2015 under generally accepted accounting principles?

Question

Quizplus · Accepted Answer

The book value of the machine as of December 31, 2014, is calculated as follows:

Cost of machine: $1,250,000
Less: Accumulated depreciation: $295,000
Book value: $955,000

Remaining useful life of the machine as of January 1, 2015, is 5 years (useful life - number of years already depreciated).

Depreciation expense for 2015 can be calculated using the straight-line method as follows:

Cost of machine: $1,250,000
Less: Estimated salvage value: $70,000
Depreciable base: $1,180,000
Depreciation per year: $1,180,000 ÷ 10 years = $118,000 per year

Depreciation expense for 2015: $118,000 x 5/10 = $59,000

However, since it became apparent in 2015 that the machine would become uneconomical after December 31, 2019, and that the machine would have no scrap value, the remaining depreciable base ($955,000) will be depreciated over the remaining 5 years (2015-2019). Therefore, the depreciation expense for 2015 will be adjusted as follows:

Depreciation expense for 2015: $955,000 ÷ 5 years = $191,000

Therefore, the correct answer is B) $191,000.

Marsh Corporation Purchased a Machine on July 1, 2012, for $1,250,000