Question

Problem 3. A company purchased a cooling system on January 2 for $225,000. The system had an estimated useful life of 15 years. After using the system for 13 full years, the company completed a renovation of the system at a cost of $33,000 and now expects the system to be more efficient and last 8 years beyond the original estimate. The company uses the straight-line method of depreciation. (a) Prepare the journal entry at January 3, to record the renovation of the cooling system. (b) Prepare the journal entry at December 31, to record the revised depreciation for the thirteenth year.

Answer 1

(a):

Date	Particulars	Debit	Credit
Jan 3	Cooling system	33,000
	Cash		33,000

Explanation: The amount of renovation will be added back to the asset and hence cooling system will be debited.

(b):

Date	Particulars	Debit	Credit
Dec 31	Depreciation expense	6,300
	Accumulated depreciation - Cooling system		6,300

Explanation: Depreciation till date = 225,000/15 * 13 = 195,000. Thus net value of the cooling system = 225,000 - 195,000 = 30,000

Now 33,000 will be added to this and hence net value after renovation = 30,000+33,000 = 63,000

Now life left = (15-13)+8 = 10 years

Thus depreciation per year = 63000/10 = $6,300 per year