Hershon Inc. acquires a new machine. It is comprised of 2 different identifiable components the P922 and the B14. Each of these components is expected to be overhauled at different intervals. The acquisition cost of the entire machine is as follows:

$\begin{array}{|l|r|}
\hline \text { Component P922: } & \$ 198,000 \
\hline \text { Component R14: } & \$ 240,000 \
\hline \text { Total } & \$ 438,000 \
\hline
\end{array}$

Component P922 is expected to have a useful life of five years and a residual value of $\$ 20,000$ before the first major overhaul is required. Component R14 is expected to have a useful life of seven years and a residual value of $\$ 15,000$ before its first overhaul.
-At the beginning of year six, component P922 undergoes a major overhaul at a cost of $100,000. The work is expected to extend its life by 3 years with a residual value of zero. Hershon uses the straight-line method to depreciate this asset. What will be the net book value of component P922 one year after the overhaul?
A) $66,667
B) $40,000
C) $120,000
D) $80,000

Question

Hershon Inc. acquires a new machine. It is comprised of 2 different identifiable components the P922 and the B14. Each of these components is expected to be overhauled at different intervals. The acquisition cost of the entire machine is as follows:

$\begin{array}{|l|r|}
\hline \text { Component P922: } & \$ 198,000 \
\hline \text { Component R14: } & \$ 240,000 \
\hline \text { Total } & \$ 438,000 \
\hline
\end{array}$

Component P922 is expected to have a useful life of five years and a residual value of $\$ 20,000$ before the first major overhaul is required. Component R14 is expected to have a useful life of seven years and a residual value of $\$ 15,000$ before its first overhaul.
-At the beginning of year six, component P922 undergoes a major overhaul at a cost of $100,000. The work is expected to extend its life by 3 years with a residual value of zero. Hershon uses the straight-line method to depreciate this asset. What will be the net book value of component P922 one year after the overhaul?
A) $66,667
B) $40,000
C) $120,000
D) $80,000

Quizplus · Accepted Answer

The original cost of component P922 is $198,000 with a residual value of $20,000 and a useful life of 5 years. The annual depreciation before the overhaul is $(\$198,000 - \$20,000) / 5 = \$35,600$. After 5 years, its book value is \$198,000 - (5 * \$35,600) = \$20,000. After the overhaul, which costs \$100,000, the new book value is \$20,000 + \$100,000 = \$120,000. With no residual value and an extended life of 3 years, the new annual depreciation is \$120,000 / 3 = \$40,000. One year after the overhaul, the net book value is \$120,000 - \$40,000 = \$80,000.

Hershon Inc Component P922 Is Expected to Have a Useful Life of 2