Question

Lundholm Company purchased a machine for $108,200 on January 1, 2016. Lundholm depreciates machines of this type by the straight-line method over a 10-year period using no salvage value. Due to a change in sales patterns, on January 1, 2018, management determines the useful life of the machine to be a total of five years. What amount should Lundholm record for depreciation expense for 2018? The tax rate is 30%. (Do not round your intermediate calculation.)

Answer 1

Depreciation expense for 2018 would be $28,853.33

Step-by-step explanation:

Cost = $108,200

Residual value = $0

Useful life = 10 years

Now,

Annual straight line depreciation =
`(Cost-Residual Value)/(Useful life)`

Annual straight line depreciation =
`(108,200 - 0)/(10)`

Annual straight line depreciation =
`(108,200)/(10)`

Annual straight line depreciation = $10,820

Accumulated depreciation for two years i.e., 2016 and 2017 would be:

Accumulated depreciation = 2 × $10,820

Accumulated depreciation = $21,640

Book value (at the end of year 2017) = Cost - Accumulated depreciation

Book value (at the end of year 2017) = $108,200 - $21,640

Book value (at the end of year 2017) = $86,560

Revised useful life = 5 years

No. years asset has been used = 2 years

Remaining useful life = 3 years

Therefore, depreciation expense for the remaining three year would be:

Revised depreciation expense =
`(Book value at the end of 2017 - Residual Value)/(Remaining useful life)`

Revised depreciation expense =
`(86,560 - 0)/(3)`

Revised depreciation expense =
`(86,560)/(3)`

Revised depreciation expense = $28,853.33