On January 1, Year 1, Eller Company purchased an asset that had cost $24,000. The asset had an 8-year useful life and an estimated salvage value of $1,000. Eller depreciates its assets on the straight-line basis. On January 1, Year 5, the company spent $6,000 to improve the quality of the asset. Based on this information, the recognition of depreciation expense in Year 5 would:

Question

Quizplus · Accepted Answer

CThe depreciation expense for each year from Year 1 to Year 4 is calculated using the straight-line method: (Cost - Salvage Value) / Useful Life = ($24,000 - $1,000) / 8 = $2,875 per year. By the end of Year 4, accumulated depreciation is $2,875 * 4 = $11,500. The book value at the beginning of Year 5 is $24,000 - $11,500 = $12,500. After the $6,000 improvement, the new book value is $12,500 + $6,000 = $18,500. Assuming the improvement does not extend the asset's life, the remaining depreciation is now spread over the remaining 4 years: ($18,500 - $1,000) / 4 = $4,375 per year. This is an increase in the annual depreciation expense from $2,875 to $4,375, which reduces total assets (due to higher accumulated depreciation) and reduces total stockholders' equity (as the expense reduces net income).

On January 1, Year 1, Eller Company Purchased an Asset