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On January 1, 2019, Happy Company purchased equipment for $114,000. The equipment was assigned a useful...

On January 1, 2019, Happy Company purchased equipment for $114,000. The equipment was assigned a useful life of 15 years and a $6,000 residual value. Happy Company will use the straight-line method to depreciate the equipment.

On January 1, 2023, Happy Company revised the life of the equipment from 15 to 20 years.

On January 1, 2026, Happy Company revised the life of the equipment from 20 to 12 years.

On January 1, 2028, Happy Company spent $58,000 to overhaul the equipment. This capital expenditure resulted in Happy Company changing the life of the equipment from 12 years to 25 years and adjusting the residual value to be $5,650 at the end of the 25 years.

Calculate the book value of the equipment at December 31, 2030.

Solutions

Expert Solution

Depreciation under straight line method = Cost - Salvage value / Useful life

Depreciation = ($114000 - $6000) / 15

= $108000 / 15 = $7200

From January 1, 2019, $7200 will be charged every year (till the date of revision) as deprecation.

On January 1, 2023 (i.e. after 4 years), useful life of the equipment has been revised from 15 to 20 years.

Accumulated depreciation till January 1, 2023 (after 4 years) = 4* $7200 = $28800

Book value on January 1, 2023 = Cost - Accumulated Depreciation

= $114000 - $28800

= $85200

Remaining useful life of the equipment on January1, 2023 is 16 years (i.e. 20 - 4) years

Revised depreciation from January 1, 2023 = Book value on January 1, 2023 - Salvage value on January 1, 2023 / Useful life

Salvage value on January 1, 2023 = 0

Revised Depreciation = $85200 / 16 = $5325

From January 1, 2023, $5325 will be charged every year (till the date of revision)) as deprecation.

On January 1, 2026 (i.e. after 7 years from purchase), useful life of the equipment has been further revised from 20 to 12 years.

Accumulated depreciation till January 1, 2026 (after 7 years from purchase) = $28800 + (3* $5325) = $28800 + $15975 = $44775

Book value on January 1, 2026 = Cost - Accumulated Depreciation

= $114000 - $44775

= $69225

Remaining useful life of the equipment on January1, 2026 is 5 years (i.e. 12 - 4 - 3) years

Revised depreciation from January 1, 2026 = Book value on January 1, 2026 - Salvage value on January 1, 2026 / Useful life

Salvage value on January 1, 2026 = 0

Revised Depreciation = $69225 / 5 = $13845.

From January 1, 2026, $13845 will be charged every year (till the date of revision)) as deprecation.

On January 1, 2028 (i.e. after 9 years of purchase), useful life of the equipment has been further revised from 12 to 25 years.

Accumulated depreciation till January 1, 2028 (after 9 years of purchase) = $28800 + (3* $5325) + (2*$13845)= $28800 + $15975 + $27690

= $72465

Book value on January 1, 2028 = Cost + Capital expenditure - Accumulated Depreciation

= $114000 + $58000 - $72465

= $99535

Remaining useful life of the equipment on January1, 2028 is 16 years (i.e. 25 - 4 - 3 -2) years

Revised depreciation from January 1, 2028 = Book value on January 1, 2028 - Salvage value on January 1, 2028 / Useful life

Salvage value on January 1, 2028 = $5650

Revised Depreciation = ($99535 - $5650) / 16 = $5868.

From January 1, 2028, $5868 will be charged every year (till the date of revision)) as deprecation.

On December 31, 2030, Accumulated Depreciation = $72465 + (3 * $5868) = $72645 + $17604 = $90249

Book value on December 31, 2030 is:

Cost - Accumulated Depreciation

= $114000 - $90249 = $23751

ekkarill92 answered 2 years ago
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