On October 1, 2022, Sandhill Manufacturing Company purchased a piece of high-tech equipment for $90,100 cash. Sandhill estimated the equipment would have a 7-year useful life and a residual value of $8,900. The company uses straight-line depreciation and has a September 30 fiscal year end.

On October 1, 2024, Sandhill paid $15,200 cash to upgrade the equipment. It is expected that the upgrade will significantly reduce the operating costs of the equipment. Sandhill also reviewed the equipment's expected useful life and estimated that, due to changing technology, the equipment's total expected useful life will be 6 years and its residual value will be $4,900.

a

Your answer is correct,

Calculate the annual depreciation expense for the first two years of the equipment's life.

Annual depreciation expense

11600

per year (b)

Your answer is correct.

Calculate the carrying amount of the equipment at September 30, 2024.

Carrying amount

$

66900. ( c Record the expenditure to upgrade the equipment on October 1, 2024. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. List debit entry before credit entry.)

Date Account Titles

Oct. 1

Equipment

Debit

Credit

15200

Cash.

15200 Record the annual depreciation of the equipment on September 30, 2025. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. List debit entry before credit entry.)

Date Account Titles

Sept.

30

Depreciation Expense

い

Let's break down each part of the problem to ensure clarity.

### a) **Annual Depreciation Expense for the First Two Years**

The equipment was purchased for $90,100, with an estimated useful life of 7 years and a residual value of $8,900.

Using the straight-line depreciation method, the annual depreciation expense is calculated as:

\[
\text{Annual Depreciation} = \frac{\text{Cost of Equipment} - \text{Residual Value}}{\text{Useful Life}}
\]
\[
\text{Annual Depreciation} = \frac{90,100 - 8,900}{7} = \frac{81,200}{7} = 11,600
\]

So, the **annual depreciation expense for the first two years is $11,600** per year.

### b) **Carrying Amount of the Equipment at September 30, 2024**

By September 30, 2024, two full years of depreciation will have occurred, so we can calculate the accumulated depreciation over these two years.

\[
\text{Accumulated Depreciation} = 11,600 \times 2 = 23,200
\]

The carrying amount is the cost of the equipment minus the accumulated depreciation:

\[
\text{Carrying Amount} = \text{Cost of Equipment} - \text{Accumulated Depreciation}
\]
\[
\text{Carrying Amount} = 90,100 - 23,200 = 66,900
\]

So, the **carrying amount at September 30, 2024, is $66,900**.

### c) **Record the Expenditure to Upgrade the Equipment on October 1, 2024**

On October 1, 2024, Sandhill spent $15,200 to upgrade the equipment. This amount is capitalized because the upgrade will reduce operating costs and extend the useful life of the equipment.

The journal entry to record the upgrade is:

| Date     | Account Titles    | Debit  | Credit |
|----------|-------------------|--------|--------|
| Oct. 1   | Equipment          | 15,200 |        |
|          | Cash               |        | 15,200 |

### d) **Record the Annual Depreciation of the Equipment on September 30, 2025**

After the upgrade, the equipment’s total useful life was revised to 6 years, and the residual value was adjusted to $4,900. The equipment’s carrying amount on October 1, 2024, is:

\[
\text{New Carrying Amount} = 66,900 + 15,200 = 82,100
\]

Now, we must depreciate this amount over the remaining useful life. Since 2 years have already passed, the equipment now has 4 years remaining, and the new residual value is $4,900.

\[
\text{New Annual Depreciation} = \frac{82,100 - 4,900}{4} = \frac{77,200}{4} = 19,300
\]

The journal entry to record the depreciation for the year ending September 30, 2025, is:

| Date      | Account Titles         | Debit   | Credit  |
|-----------|------------------------|---------|---------|
| Sept. 30  | Depreciation Expense    | 19,300  |         |
|           | Accumulated Depreciation|         | 19,300  |

---

### Do you want further details or have any other questions?

Here are some related questions for you to explore:
1. How would the depreciation change if the upgrade did not extend the useful life of the equipment?
2. What is the impact on financial statements if the equipment's useful life was overestimated initially?
3. How would the accounting differ if the upgrade was considered a repair rather than a capital improvement?
4. What are the tax implications of capitalizing versus expensing equipment upgrades?
5. How would the equipment's carrying amount change if there was an impairment at the end of the fiscal year?

**Tip**: Always reassess the useful life and residual value of fixed assets whenever significant changes or upgrades occur.

On October 1, 2022, Sandhill Manufacturing Company purchased a piece of high-tech equipment for $90,100 cash. Sandhill estimated the equipment would have a 7-year useful life and a residual value of $8,900. The company uses straight-line depreciation and has a September 30 fiscal year end. On October 1, 2024, Sandhill paid $15,200 cash to upgrade the equipment. It is expected that the upgrade will significantly reduce the operating costs of the equipment. Sandhill also reviewed the equipment's expected useful life and estimated that, due to changing technology, the equipment's total expected useful life will be 6 years and its residual value will be $4,900. Calculate the annual depreciation expense for the first two years of the equipment's life. Calculate the carrying amount of the equipment at September 30, 2024. Record the expenditure to upgrade the equipment on October 1, 2024. Record the annual depreciation of the equipment on September 30, 2025.

Learn how to calculate the annual depreciation expense and carrying amount of high-tech equipment purchased by Sandhill Manufacturing, using straight-line depreciation. This problem involves recalculating useful life, journal entries, and understanding the financial impact of equipment upgrades.

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