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. How does the Year 5 depreciation expense impact the financial statements?
A)Increase total assets by $4,375
B)Decrease stockholders' equity by $4,375
C)Decrease total assets by $4,625
D)Increase stockholders' equity by $4,625

Question

Quizplus · Accepted Answer

The improvement cost of $6,000 is capitalized, increasing the asset's book value. The remaining useful life after Year 4 is 4 years. The new depreciation expense is calculated on the new book value ($24,000 - $12,000 accumulated depreciation + $6,000 improvement) over the remaining 4 years, resulting in a $4,375 annual depreciation expense. This expense decreases stockholders' equity.

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