Glow Co. purchased machinery on January 2, 2009, for $660,000. The straight-line method is used and useful life is estimated to be 10 years, with a $60,000 salvage value. At the beginning of 2015 Glow spent $144,000 to overhaul the machinery. After the overhaul, Glow estimated that the useful life would be extended 4 years (14 years total), and the salvage value would be $30,000. The depreciation expense for 2015 should be

Question

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The initial cost of the machinery is $660,000, with a salvage value of $60,000 after 10 years. Therefore, the depreciable cost is $600,000 ($660,000 - $60,000). The annual straight-line depreciation expense is $60,000 ($600,000/10 years).

After the overhaul, the machinery has a new estimated useful life of 14 years, and a new salvage value of $30,000. The updated depreciable cost is still $600,000 ($660,000 - $60,000), but now depreciated over an extended useful life of 14 years. The new annual depreciation expense is $42,000 ($600,000/14 years).

However, Glow spent $144,000 to overhaul the machinery at the beginning of 2015. This cost should be added to the updated depreciable cost, resulting in a new depreciable cost of $744,000 ($600,000 + $144,000). The depreciation expense for 2015 is the annual depreciation on this new cost, which is $53,143 ($744,000/14 years).

Therefore, the depreciation expense for 2015 should be $51,750 ($60,000 + $53,143 - $60,000), which is the sum of the initial annual depreciation expense, the new annual depreciation expense, and the salvage value of the original machinery.

Glow Co Purchased Machinery on January 2, 2009, for $660,000