Question

On January 1, Year 1, Eller Company purchased an asset that had cost $24,000. The asset had an 8-year useful life and an estimated salvage value of $1,000. Eller depreciates its assets on the straight-line basis. On January 1, Year 5, the company spent $6,000 to improve the quality of the asset. Based on this information, the recognition of depreciation expense in Year 5 would

- increase total assets by $4,375.- reduce total equity by $4,375.- reduce total assets by $4,625.- increase total equity by $4,625.

Answer 1

Reduce total equity by $4,375

Step-by-step explanation:

Basic Depreciation calculated, that is straight line depreciation =
`(Cost\ -\ Salvage\ Value)/(Estimated\ life)`

Provided Cost = $24,000

Salvage value = $1,000

Estimated life = 8 years

Therefore, depreciation = $23,000/8 = $2,875 for each year.

Depreciation for 4 years = $2,875
`*` 4 = $11,500

Carrying value of asset = $24,000 - $11,500 = $12,500

Add: Expenses incurred in the beginning of year 5 = $6,000

Carrying value = $18,500

Salvage = $1,000

Expected life = 4 years

Depreciation = ($18,500 - $1,000)/4 = $4,375

With this amount the revenues will decrease accordingly stock holders equity will also decrease.

Further the balance of assets will also reduce with the same.