Sunland Company purchased machinery on January 2, 2015, for $900000. The straight-line method is used and useful life is estimated to be 10 years, with a $79000 salvage value. At the beginning of 2021 Sunland spent $193000 to overhaul the machinery. After the overhaul, Sunland estimated that the useful life would be extended 4 years (14 years total), and the salvage value would be $44000. The depreciation expense for 2021 should be

Answer: $63,625

Explanation:

First calculate the new Accumulated Depreciation.

Because there was an overhaul, this overhaul Reduces the depreciation of the machinery by the amount spent on the Overhaul.

Depreciation per year using Straight line is ignoring the old salavage value,

= 900,000 / 10

= $90,000

2015 to 2021 has been 6 years so,

= 90,000 * 6

= $540,000

The overhauling reduces the Accumulated Depreciation balance by it's amount so,

= 540,000 - 193,000

= $347,000

$347,000 is the new Accumulated Depreciation.

The book value of the machinery is therefore,

= 900,000 - 347,000

= $553,000

The calculate the new depreciation expense,

= 553,000 - 44,000 (new salvage balance)

= $509,000 / 8 years (4 years added by overhaul and 4 years remaining from original period)

= $63,625 per year