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Highway Construction Incorporated (HCI) bought a large piece of construction equipment at the beginning of 20X5.

• The construction equipment was a large piece of heavy equipment with an original cost of $ 600,000. This equipment was broken out into four components. The shell of the equipment is $ 200,000 and anticipated to last 10 years. The motor costs $ 180,000 and needs to have a major overhaul and inspection every three years. The tires cost $ 20,000 and need to be replaced every two years. The shovel at the front of the equipment costs $ 170,000 and needs to be replaced every five years. The remainder of the cost, $ 30,000, is made up of insignificant parts. These are grouped together and are replaced on aver-age every two years.

• Expected residual value at the end of 10 years for the shell is $ 8,000. The residual value for the remaining components is zero.

• HCI uses straight- line amortization for all construction equipment.

Required:

1. What is the depreciation expense for 20X5 assuming a full year’s worth of depreciation?

2. How would the amount of depreciation differ with component depreciation compared with taking depreciation on the construction equipment without breaking it into components?

3. What is the logic behind component accounting?

• The construction equipment was a large piece of heavy equipment with an original cost of $ 600,000. This equipment was broken out into four components. The shell of the equipment is $ 200,000 and anticipated to last 10 years. The motor costs $ 180,000 and needs to have a major overhaul and inspection every three years. The tires cost $ 20,000 and need to be replaced every two years. The shovel at the front of the equipment costs $ 170,000 and needs to be replaced every five years. The remainder of the cost, $ 30,000, is made up of insignificant parts. These are grouped together and are replaced on aver-age every two years.

• Expected residual value at the end of 10 years for the shell is $ 8,000. The residual value for the remaining components is zero.

• HCI uses straight- line amortization for all construction equipment.

Required:

1. What is the depreciation expense for 20X5 assuming a full year’s worth of depreciation?

2. How would the amount of depreciation differ with component depreciation compared with taking depreciation on the construction equipment without breaking it into components?

3. What is the logic behind component accounting?

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