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mrahman8 · Aug 16, 2013, 10:37 AM

Cara Company purchased a vehicle for $23,000, and estimated its useful life to be 8 years and its salvage value to be $4,000. After 6 years of straight-line depreciation, Cara decided to do a major overhaul at a cost of $9,500, which are
expected to extend the life of the vehicle by 5 years beyond the original estimate. The new estimated salvage value is $2,000. The depreciation expense in year 7 equals:
A) $ 2,464
B) $ 2,321
C) $ 2,035
D) $ 1,893.
E) $ 1,750

pready · Aug 16, 2013, 01:50 PM

First you have to calculate the amount of depreciation for 6 years.

So take your cost of $23,000 minus salvage value of $4,000 to get your depreciable base. Now take your depreciable base divided by number of years of 8 to get your depreciation per year. Now take your depreciation per year amount times 6 years of use to get your accumulated depreciation amount or total amount of depreciation for 6 years.

Now you need to get your remaining cost of the vehicle, so take your original cost of $23,000 minus the total amount of depreciation calculated above and add your cost of $9,500 overhaul to get your new cost of your vehicle. Now take this amount minus your salvage value of $2,000 to get your new depreciable base.

Now take your new depreciable base divided by 7 years useful life(2years remaining from 6 years of depreciaiton plus 5 years extended useful life) to get your depreciation amount per year. This will also be your amount of depreciation for year 7.