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.

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stokholm stokholm · Answer 1 · 2019-10-11T11:26:18+02:00

Answer:

Reduce total equity by $4,375

Explanation:

Basic Depreciation calculated, that is straight line depreciation = [tex]\frac{Cost\ -\ Salvage\ Value}{Estimated\ life}[/tex]

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 [tex]\times[/tex] 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.