XYZ Inc purchased an asset on January 1 2015 for 12800 The a

XYZ Inc. purchased an asset on January 1, 2015, for $12,800. The asset was expected to have a ten-year life and a $1,000 salvage value. XYZ Inc. uses the straight-line method of depreciation. On January 1, 2017, XYZ Inc. made a major repair to the asset of $5,000, extending its life. The asset is expected to last ten years from January 1, 2017.

Calculate the amount of depreciation for 2017.

Solution

Straight line of depreciation=

Cost of asset less salvage value/life of asset

So, $12800-$1000/10

= $1180

Depreciation for year 2015 & 2016 will be = 2*1180

= $2360

Value of assets at beginning of year 2017 will be

=$12800-$2360

=$ 10440

Now in year 2017 a major repair has been made to the asset which increases life of asset by 10 years as on January 1, 2017 so this $5000 should be capitalized to the asset and again depreciation should be calculated.

New value of asset as on January 1,2017 is =$10440+$5000

=$ 15440

So new depreciation for year 2017 will be

=$ 15440-$1000/10

=$ 1444