Question

Mobic Inc. acquired some manufacturing equipment in January 2015 for $400,000 and depreciated it $40,000 each year for three years on a straight-line basis. During 2018, the manufacturer announced a new technology for this type of equipment that will make the old models obsolete by the end of 2021. As a result, Mobic will plan to replace the equipment at that time, effectively reducing the asset's life from ten to seven years. In its financial statements for 2018, Mobic should:
A) Charge $280,000 in depreciation expense.B) Report the book value of the equipment in its December 31,2018 balance sheet at $210,000.C) Make an adjustment to retained earnings for the error in measuring depreciation during 2015-2017.D) None of these answer choices are correct

Answer 1

Answer:

B) Report the book value of the equipment in its December 31,2018 balance sheet at $210,000.

Explanation:

• Cost = $400,000

Accumulated Depreciation = $40,000 x 3 = $120,000

Salvage Value = $0

Book Value = Cost - Accumulated Depreciation

= $400,000 - $120,000 = $280,000

Useful Life =  7 - 3 = 4 Years

Revised Annual Depreciation = (Book Value - Salvage Value) / Useful Life

= ($280,000 - $0) / 4

= $70,000

• Hence the Balance Sheet entry will be as follows:

Mobic Inc.

Balance Sheet as of December 31, 2018

Fixed Assets:                                                 $                  $  

Equipment                                                  280,000              

Less: Accumulated Depreciation               (70,000)          

Book Value of Equipment                                             210,000  

So the correct answer will be;

B) Report the book value of the equipment in its December 31,2018 balance sheet at $210,000.