Question

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. Marino uses the straight-line method. On January 1, Year 3, Marino’s accounting records contained the following account balances: Acc. Dep. (20,000) Also, on January 1, Year 3 the company paid $10,000 to replace an engine that extended the useful life of the asset from a total of four years to a total of seven ears. Based on this information, the amount of depreciation expense shown on the Year 3 income statement is

a) 9200
b) 6000
c) 5200
d) 2000

Answer 1

The depreciation expense shown on the Year 3 income statement after engine replacement and the extension of the truck's useful life is $6,000, calculated using the straight-line depreciation method over the remaining useful life of the truck.

Step-by-step explanation:

The amount of depreciation expense shown on the Year 3 income statement for Marino Moving Company, after the replacement of the engine and extension of the truck's useful life, can be calculated using the straight-line depreciation method. We first calculate the book value of the truck as of Year 3 by subtracting the accumulated depreciation from the initial cost ($48,000 - $20,000 = $28,000). After the engine replacement costing $10,000, the adjusted book value becomes $38,000. Given the extension of the useful life to seven years in total and considering that two years have already elapsed, we have five years remaining. The new annual depreciation expense is calculated by subtracting the salvage value ($8,000) from the adjusted book value ($38,000) and dividing by the remaining years (5), resulting in $6,000 annual depreciation expense ($38,000 - $8,000 = $30,000 / 5 years). Therefore, the correct answer is (b) $6,000.