Question

Some company purchased a vehicle for deliveries for $45,000 at the beginning of 2017. The vehicle had an estimated life of 6 years, and an estimated residual value of $3,000. Company used the straight-line depreciation method. At the beginning of 2021, company incurred $4,000 to replace the vehicle's transmission. This resulted in a 2-year extension of the vehicle's useful life and a revised residual value of $1,000. How much annual depreciation expense should the company record for the remaining four years of the vehicle's life?

A. $5,000

B. $7,000

C. $4,000

D. $4,500

Answer 1

The problem is related to the revision of useful life of asset and related depreciation to be recorded.

First of all we need to calculate the carrying value of asset at the beginning of 2021 before replacing of vehicle transmission.

Cost of Assets Purchase	$45,000
Less: Accumulated Depreciation for 4 Years (2017 to 2020) (Cost of Assets 45,000 - Residual Value 3,000) / Useful life 6 * 4 years	($28,000)
Carrying Value of Assets at beginning of 2021	$17,000

Since the replacing of vehicle transmission increases the life of asset, the amount incurred $4,000 would be capitalized in the value of asset.

So the Carrying Value of Asset after capitalization of cost = $17,000 + $4,000 = $21,000

Now, the revised depreciation expenses are calculated on revised depreciable asset value $21,000 for the remaining estimated useful life of asset.

Revised Annual Depreciation = (Cost of Assets $21,000 – Revised Residual Value $1,000) / Estimated Remaining useful life of assets 4

= $5,000

Hence, the correct option is A. $5,000

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