Based on the 2013 data, what is the useful life of existing, depreciable PP&E as of December 31, 2013? (round to nearest whole year)

• A. 4 yrs
• B. 5 yrs
• C. 6 yrs
• D. 7 yrs

Answer: (B)

Focus on the assets that were in service at the beginning of 2013 and how they depreciate over the year. The idea is to estimate how long those existing assets will continue to yield economic benefits, using the straight-line depreciation framework.

In practice, we separate the year’s depreciation into two parts: depreciation on assets that were already in service at the start of the year (existing assets) and depreciation on any new purchases made during the year. The remaining life of the existing base is approximated by dividing the net book value of those existing assets at year-end by the depreciation expense that relates to them in 2013. In other words, remaining life ≈ NBV of existing assets at 12/31/2013 divided by depreciation charged to those assets in 2013.

The data given in the problem are consistent with a remaining life around five years when you isolate the depreciation on the existing pool from the total depreciation and use the year-end net book value of that pool. That yields approximately five years when rounded to the nearest year, which is why five is the best answer.

If you instead used the entire PP&E without separating existing from new, the ratio would reflect the combined assets and typically produce a different result (not five). The key is focusing on the assets already in service and the depreciation they incurred during the year.