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Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition by Donald E. Kieso, Paul D. Kimmel, Jerry J. Weygandt

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EXERCISE 9-5

Purpose: (L.O. 2, 3) This exercise will provide you with an illustration of how to handle a change in the estimated service life and salvage value of a plant asset due to an expenditure subsequent to acquisition.

The Royal Company purchased a machine at the very end of 2001 for $210,000. The machine was being depreciated using the straight-line method over an estimated life of 20 years, with a $30,000 salvage value. At the beginning of 2012, the company paid $50,000 to overhaul the machine. As a result of this improvement, the company estimated that the useful life of the machine would be extended an additional 5 years, and the salvage value would be reduced to $20,000.

Instructions

Compute the depreciation charge for 2012.

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