Question

On January 1, 2018, Harlow Company paid $156,000 to purchase a piece of
equipment. Before the equipment could be used, Harlow had to spend $6,000
to put the equipment in working order.

The equipment was assigned a useful life of 12 years and a salvage value
of $9,000. The straight-line method will be used to record depreciation
on the equipment.

On January 1, 2025, Harlow Company decided the life of the equipment should
be revised from 12 to 15 years with a salvage value of $5,150 at the end
of the 15 years.

Calculate the book value of the equipment at December 31, 2026.

Answer 1

Answer:

= $ 55,850

Working Note:

Purchase price	$ 156,000.00
Installation	$     6,000.00
Total cost	$ 162,000.00
Depreciation per year (162000-9000)/12	$   12,750.00
Depreciation for 7 years	$   89,250.00
Value on 01-Jan-25	$   72,750.00
Depreciation per year (72750-5150)/8	$     8,450.00
Depreciation for 2 years	$   16,900.00
Value on 31-Dec-26	$   55,850.00

Explanation:

1. Harlow co purchased the equipment for $ 162,000 ( ie. 156,000 + 6,000).
2. Depreciation as per SLM = (Cost - Scrap value ) / Life of asset
3. Depreciation = (162000-9000)/12 = $ 12,750 per year
4. This will continue till 1- Jan 25 till he company decides to change the life and scrap value of the asset. Time from 1-Jan 18 to 1-Jan 25 is 7 years.
5. Depreciation for 7 years is $ 89,250 (i.e.12,750*7)
6. Book value on 1- Jan 25 is $ 72,750 ( ie. 162,000-89,250)
7. Depreciation for the coming years will change as there is a change in the life and scrap value of the asset.
8. Depreciation (for coming years) = ($72,750 - $ 5,150)/8 = $ 8,450 per year
9. We need to calculate book value on 31 - Dec 26. So, we need to find depreciation for 2 years (1-Jan 25 to 31 - Dec 26)
10. Depreciation for 2 years = $ 16,900.00 ( $ 8,450 * 2)
11. Book value on 31-Dec-26 is $   55,850.00 ( ie. $   72,750.00 - $16,900.00)

In case of any doubt, please comment.