On January 1, Year 1, Eller Company purchased an asset that had cost $24,000. The asset had an 8-year useful life and an estimated salvage value of $1,000. Eller depreciates its assets on the straight-line basis. On January 1, Year 5, the company spent $6,000 to improve the quality of the asset. Based on this information, the recognition of depreciation expense in Year 5 would:

Reduce total equity by $4,375

Explanation:

Calculation to determine what the recognition of depreciation expense in Year 5 would:

First step is to calculate the Depreciation amount for each year

Depreciation = $23,000/8

Depreciation= $2,875

Second step is to calculate the Depreciation for 4 years

Depreciation for 4 years = $2,875* 4

Depreciation for 4 years = $11,500

Third step is to calculate the Carrying value of asset

Carrying value of asset = ($24,000 - $11,500)+$6,000

Carrying value of asset = $12,500+$6,000

Carrying value = $18,500

Now let calculate what the recognition of depreciation expense in Year 5 would:

Recognition of depreciation expense in Year 5 = ($18,500 - $1,000)/4

Recognition of depreciation expense in Year 5 = $4,375

Therefore Recognition of depreciation expense in Year 5 would Reduce total equity by $4,375

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