Fernbank Farms
At the beginning of Year 1, this company purchased a semi-trailer at a cost of $100,000. The truck has an estimated life of five years and an estimated residual value of $20,000, and it will be depreciated using the straight-line method. On January 1, Year 3, the company made $30,000 worth of repairs to the truck that extended its life by 3 years. Thus, starting with Year 3, the truck has a remaining life of five years and a new salvage value of $8,000.
-Refer to the figure Fernbank Farms.When calculating depreciation for Year 3,which of the following should the company's accountant do?

Question

Quizplus · Accepted Answer

The company should add the $30,000 cost of repairs to the original cost of $100,000, resulting in a new depreciable basis of $130,000. This amount should be allocated over the remaining adjusted useful life of 5 years. This is because the repairs extended the life of the truck by 3 years, and thus the company should adjust the remaining useful life and salvage value accordingly. Option B is incorrect because the change in useful life occurred in Year 3, not Year 1. Option C is incorrect because the $30,000 cost is not a separate asset, but rather a repair that extended the life of the existing asset. Option D is incorrect because the original cost of $100,000 should be depreciated over the original useful life of 5 years, and the repairs should be added and depreciated separately over the remaining useful life.

Fernbank Farms at the Beginning of Year 1, This Company Purchased a Purchased