Gates Co. purchased machinery on January 2, 2005, for $440,000. The straight-line method is used and useful life is estimated to be 10 years, with a $40,000 residual value.

At the beginning of 2011 Gates spent $96,000 to overhaul the machinery. After the overhaul, Gates estimated that the useful life would be extended 4 years (14 years total), and the residual value would be $20,000.

The depreciation expense for 2011 should be:

a. $28,250.

b. $34,500.

c. $40,000.

d. $37,000.

b. $34,500

Explanation:

For computing the depreciation expense for 2011, first we have to do the following calculations which are shown below:

Depreciation expense under Straight-line method would be

= (Purchase value of machinery - residual value) : (estimated useful life)

= ($440,000 - $40,000) : (10 years)

= $400,000 : 10 years

= $40,000

From January 2, 2005 to the beginning of 2011, it have 6 years so the accumulated depreciation would be

= $40,000 * 6 years

= $240,000

And, the book value would be

= Purchase value of machinery - accumulated depreciation

= $440,000 - $240,000

= $200,000

Now the depreciation expense for 2011 would be

= (Book value + spent amount - salvage value) : (remaining life)

= ($200,000 + $96,000 - $20,000) : (8 years)

= $276,000 : 8 years

= $34,500

Total years is 14 and the accumulated depreciation year is 6 years so, the remaining year would be 8 years