On January 1, 2019, Romero Company purchased equipment for $320,000. The equipment was assigned an $18,000 residual value and a 16-year life. Romero Company will use the straight-line method to depreciate the equipment. On January 1, 2027, Romero Company spent $41,000 to overhaul the equipment. This capital expenditure resulted in Romero Company changing the life of the equipment from 16 years to 30 years and adjusting the residual value to be $17,500 at the end of the 30 years. Calculate the book value of the equipment at December 31, 2030.

$175,000

Explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset

Mathematically,  

Depreciation = (Cost - Salvage value)/Estimated useful life

The book value of an asset is the cost less the accumulated depreciation of the asset.

If On January 1, 2019, Romero Company purchased equipment for $320,000. The equipment was assigned an $18,000 residual value and a 16-year life. Then

Depreciation = ($320,000 - $18,000)/16

= $18,875

On January 1, 2027 (after 8 years remaining 8 years), Romero Company spent $41,000 to overhaul the equipment

The carrying amount of the asset before overhaul

= $320,000 - 8($18,875 )

= $169,000

The carrying amount of the asset after overhaul

= $169,000 + $41,000

= $210,000

If This capital expenditure resulted in Romero Company changing the life of the equipment from 16 years to 30 years and adjusting the residual value to be $17,500 at the end of the 30 years, the remaining useful life would be 22 years.

Annual depreciation

= ($210,000 - $17,500)/22

= $8,750

Book value of the equipment at December 31, 2030 (4 years after)

= $210,000 - $8750(4)

= $175,000

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