Question

Joe's Quik Shop bought equipment for $25,000 on January 1, 2006. Joe estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2007, Joe decides that the business will use the equipment for a total of 6 years. What is the revised depreciation expense for 2007?a. $4,000b. $2,000c. $3,333d. $5,000

Answer 1

option (a) 4,000

Step-by-step explanation:

Data provided in the question:

cost of the equipment bought by Joe = $25,000

Estimated useful life = 5 years

Salvage value = $0

therefore,

The annual depreciation =
`\frac{\textup{Cost-salvage value}}{\textup{Estimated useful life}}`

`(\$25,000-$0)/(5)`

= $5,000 per year

Thus,

Book value on January 1, 2007

= Cost on January 1, 2006 - Depreciation till January 1, 2007

= $25,000 - ( $5,000 × 1 )

= $20,000

Now,

The revised useful life is 6 years on January 1, 2007 but the 1 year has already been over

Thus,

remaining useful life = 6 - 1 = 5 years

Thus,

The revised depreciation =
`\frac{\textup{Book value -salvage value}}{\textup{Remaining useful life}}`

`(\$20,000-$0)/(5)`

= $4,000 per year

Hence,

The correct answer is option (a) 4,000