Abigael Company purchased a tooling machine in 1993 for P2,500,000. The machine was being depreciated on the straight-line method over an estimated useful life of twenty years, with no salvage value. At the beginning of 2003, when the machine had been in use for ten years. Abigael Company paid P550,000 to overhaul the machine. As a result of this improvement, it is estimated that the useful life of the machine would be extended an additional five years. What should be the depreciation expense recorded for the above machine in 2003?
Question
Abigael Company purchased a tooling machine in 1993 for P2,500,000. The machine was being depreciated on the straight-line method over an estimated useful life of twenty years, with no salvage value. At the beginning of 2003, when the machine had been in use for ten years. Abigael Company paid P550,000 to overhaul the machine. As a result of this improvement, it is estimated that the useful life of the machine would be extended an additional five years. What should be the depreciation expense recorded for the above machine in 2003?
Solution
To calculate the depreciation expense for the machine in 2003, we need to consider both the initial cost and the overhaul cost, as well as the new total estimated useful life.
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Calculate the remaining book value of the machine before the overhaul in 2003. The machine was purchased in 1993 for P2,500,000 and was being depreciated over 20 years. So, the annual depreciation is P2,500,000 / 20 = P125,000. After 10 years of use, the accumulated depreciation is P125,000 * 10 = P1,250,000. Therefore, the book value of the machine at the beginning of 2003 is P2,500,000 - P1,250,000 = P1,250,000.
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Add the cost of the overhaul to the book value of the machine. The overhaul cost P550,000, so the new total cost of the machine is P1,250,000 + P550,000 = P1,800,000.
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Calculate the new total estimated useful life of the machine. The machine was originally expected to last 20 years, and the overhaul extended this by 5 years, so the new total estimated useful life is 20 + 5 = 25 years.
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Calculate the remaining useful life of the machine after the overhaul. The machine had been in use for 10 years before the overhaul, so it has 25 - 10 = 15 years of useful life remaining.
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Calculate the new annual depreciation expense. This is the new total cost of the machine divided by the remaining useful life, or P1,800,000 / 15 = P120,000.
So, the depreciation expense recorded for the machine in 2003 should be P120,000.
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