Question

Chattanooga Company purchased a depreciable asset for $80,000 on January 1, 2015. The estimated salvage value is $20,000, and the estimated useful life is 5 years. The straight-line method is used for depreciation. On January 1, 2017, the company made a capital expenditure of $16,000 for an addition to the asset. What is depreciation expense for 2017? (Assume that salvage value remains unchanged)

A)$25,333
B)$24,000
C)$17,333
D)$14,400

Answer 1

The depreciation expense for 2017 after a capital expenditure is $24,000. This is calculated by adding the new expenditure to the remaining base after accumulated depreciation, resulting in an annual depreciation over the remaining life of the asset.

Step-by-step explanation:

The Chattanooga Company needs to calculate the depreciation expense for the year 2017. The original cost of the asset was $80,000 with a salvage value of $20,000 and an estimated useful life of 5 years, which results in an annual depreciation amount of ($80,000 - $20,000) / 5 = $12,000. However, an additional capital expenditure was made on January 1, 2017, of $16,000, which needs to be depreciated over the remaining useful life of the asset, starting from the date of the expenditure. The asset now has 3 years remaining in its useful life (2017, 2018, and 2019).

To calculate the depreciation expense for 2017, we combine the original depreciation of $12,000 with the depreciation of the new capital expenditure. The revised depreciable base of the asset is $56,000 ($80,000 original cost - $24,000 accumulated depreciation for two years) plus the $16,000 expenditure, totaling $72,000. The new depreciation expense for this revised depreciable base over the remaining 3 years would be $72,000 / 3 = $24,000 per year.

Therefore, the depreciation expense for 2017 is $24,000.