On January 1, 2014, Snyder Company spent $820 on an asset (a machine) to improve its quality. The machine had been purchased on January 1, 2010 for $4,200 and had an estimated salvage value of $600 and a useful life of five years. Which of the following correctly shows the effects of the 2014 expenditure on the financial statements?
A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question

On January 1, 2014, Snyder Company spent $820 on an asset (a machine) to improve its quality. The machine had been purchased on January 1, 2010 for $4,200 and had an estimated salvage value of $600 and a useful life of five years. Which of the following correctly shows the effects of the 2014 expenditure on the financial statements? 
A) Choice A 
B) Choice B 
C) Choice C 
D) Choice D

Quizplus · Accepted Answer

Choice C correctly shows the effects of the 2014 expenditure on the financial statements. The $820 expenditure increases the machine's cost to $5,020 ($4,200 + $820), and this new cost is used to calculate depreciation expense going forward. The machine's accumulated depreciation at the end of 2013 would be $3,600 ($4,200 cost - $600 salvage value × 4 years of use), which means the machine had a book value of $600 ($4,200 cost - $3,600 accumulated depreciation) at the beginning of 2014. Depreciation expense for 2014 would be ($5,020 cost - $600 salvage value) ÷ 5 years of useful life = $884. The $820 expenditure is not expensed immediately because it improves the machine's quality and extends its useful life. The effects of the 2014 expenditure on the income statement, balance sheet, and statement of cash flows are correctly shown in choice C.

On January 1, 2014, Snyder Company Spent $820 on an Asset